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| Section | Weight | Objectives |
|---|---|---|
| Topic 1: Financial Policy Decisions | 15% | - Dividend and distribution policy
|
| Topic 2: Business Valuation | 20% | - Valuation concepts and purposes
|
| Topic 3: Sources of Long-Term Finance | 25% | - Debt and hybrid finance
|
| Topic 4: Investment Appraisal and Decisions | 25% | - Advanced investment appraisal techniques
|
| Topic 5: Financial Risk Management | 15% | - Risk mitigation and hedging strategies
|
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NEW QUESTION # 187
A company has forecast the following results for the next financial year:
The following is also relevant:
* Profit after tax for the year can be assumed to be equivalent to free cash flow for the year.
* Debt finance comprises a $10 million floating rate loan which currently carries an interest rate of 5%.
* $400,000 investment in non-current assets is required to achieve required growth, all of which is to financed from next year's free cash flow.
* The company plans to pay a dividend of $150,000 next year, financed from next year's free cash flow.
The company is concerned that interest rates could rise next year to 6% which could then affect their investment plans.
If interest rates were to rise to 6% and the company wishes to maintain its dividend amount, the planned investment expenditure will decrease by:
Answer: B
Explanation:
Forecast P&L ('000):
Operating profit = 1,300
Interest at 5% on $10m = 500
Profit before tax = 800
Tax (25%) = 200
Profit after tax = 600
Profit after tax # free cash flow (FCF).
Planned uses of next year's FCF at current rates:
Investment in non-current assets = 400
Dividend = 150
Total = 550, leaving 50 spare from FCF 600.
If interest rises to 6%:
New interest = 10m × 6% = 600
New PBT = 1,300 # 600 = 700
Tax = 25% of 700 = 175
New PAT (FCF) = 700 # 175 = 525
Available for investment after paying the same dividend 150:
525#150=375525 - 150 = 375525#150=375
Original planned investment = 400 # now only 375 possible.
Reduction in planned investment = 400 # 375 = 25.
NEW QUESTION # 188
A company plans a four-year project which will be financed by either an operating lease or a bank loan.
Lease details:
* Four year lease contract.
* Annual lease rentals of $45,000, paid in advance on the 1st day of the year.
Other information:
* The interest rate payable on the bank borrowing is 10%.
* The capital cost of the project is $200,000 which would have to be paid at the beginning of the first year.
* A salvage or residual value of $100,000 is estimated at the end of the project's life.
* Purchased assets attract straight line tax depreciation allowances.
* Corporate income tax is 20% and is payable at the end of the year following the year to which it relates.
A lease-or-buy appraisal is shown below:
Which THREE of the following items are errors within the appraisal?
Answer: B,C,F
Explanation:
B). Tax relief on lease payments have not been lagged correctly - ERROR
Tax is paid one year after the year to which it relates. Lease rentals in each project year (1-4) give tax relief in years 2-5. In the appraisal, the tax relief on lease payments is shown too early (years 1-4), so the lag is wrong.
C). Using the 10% discount rate is incorrect - ERROR
A lease-versus-buy comparison should discount finance cash flows at the after-tax cost of borrowing, not the nominal interest rate. Here, the after-tax cost of debt is:
10%×(1#0.20)=8%10\% \times (1 - 0.20) = 8\%10%×(1#0.20)=8%
So using 10% is an error.
F). The salvage value has been included within the lease option - ERROR
Under an operating lease the asset is not owned by the lessee, so it does not receive the $100,000 residual value. Including a salvage value in the leasing case is therefore incorrect.
Options D and E are not errors (operating cash flows and specific loan repayments are rightly excluded), and the timing of the lease payments themselves (A) is correct.
NEW QUESTION # 189
The table below shows the forecast for a company's next financial year:
The forecast incorporates the following assumptions:
* 25% of operating costs are variable
* Debt finance comprises a $400 million fixed rate loan at 5%
* Corporate income tax is paid at 25%
The company plans to do the following next year from the forecast earnings on the assumption that earnings will be equivalent to free cash flow:
* Pay a total dividend of $20 million
* Invest $40 million in new projects
What is the maximum % reduction in operating activity that could occur next year before the company's dividend and investment plans are affected?
Give your answer to the nearest 0.1%.
Answer: A
NEW QUESTION # 190
A company has:
* $7 million market value of equity
* $5 million market value of debt
* WACC of 9.375%
* Corporate income tax rate of 15%
According to Modigliani and Miller's theory of capital structure with tax, what is the ungeared cost of equity?
Answer: A
NEW QUESTION # 191
A company is planning a share buyback. In which of the following circumstances would a share buyback be appropriate?
Answer: A
NEW QUESTION # 192
......
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