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NEW QUESTION # 288
A company has:
* A price/earnings (P/E) ratio of 10.
* Earnings of $10 million.
* A market equity value of $100 million.
The directors forecast that the company's P/E ratio will fall to 8 and earnings fall to $9 million.
Which of the following calculations gives the best estimate of new company equity value in $ million following such a change?
A)
B)
C)
D)
Answer: A
NEW QUESTION # 289
A listed company plans to raise $350 million to finance a major expansion programme.
The cash flow projections for the programme are subject to considerable variability.
Brief details of the programme have been public knowledge for a few weeks.
The directors are considering two financing options, either a rights issue at a 20% discount to current share price or a long term bond.
The following data is relevant:
The company's share price has fallen by 5% over the past 3 months compared with a fall in the market of 3% over the same period.
The directors favour the bond option.
However, the Chief Accountant has provided arguments for a rights issue.
Which TWO of the following arguments in favour of a right issue are correct?
Answer: C,E
Explanation:
A). The issue of bonds might limit the availability of debt finance in the future.
If the project is financed by a bond, gearing rises to 2:5, increasing financial risk and using up debt capacity.
A rights issue instead reduces gearing to 1:5, preserving future borrowing capacity.
C). The rights issue will lead to less pressure on the operating cash flows of the programme.
Bond finance requires fixed interest payments (and eventual redemption), which must be met regardless of project cash flow variability. Equity raised via a rights issue has no mandatory interest and dividends are discretionary, so it places less strain on operating cash flows.
NEW QUESTION # 290
A company has announced a rights issue of 1 new share for every 4 existing shares.
Relevant data:
* The current market price per share is $10.00.
* Rights are to be issued at a 20% discount to the current price.
* The rate of return on the new funds raised is expected to be 10%.
* The rate of return on existing funds is 5%.
What is the yield-adjusted theoretical ex-rights price?
Give your answer to two decimal places.
$ ?
Answer: B
NEW QUESTION # 291
A company is considering hedging the interest rate risk on a 3-year floating rate borrowing linked to the 12-month risk-free rate.
If the 12-month risk-free rate for the next three years is 2%, 3% and 4%, which of the following alternatives would result in the lowest average finance cost for the company over the three years?
Answer: A
NEW QUESTION # 292
Company WWW is considering making a takeover bid for Company KKA Company KKA's current share price is $5.00 Company WWW is considering either
" A cash payment of $5.75 for each share in Company KKA
" A 5 year corporate bond with a market value of $90 in exchange for 15 shares in Company KKA Calculate the highest percentage premium which Company KKA shareholders will receive.
Answer: D
Explanation:
Current KKA share price = $5.00
Cash offer: $5.75 per share
Premium = (5.75 # 5.00) / 5.00 = 0.75 / 5 = 15%
Bond offer: market value $90 bond for 15 KKA shares
Value per KKA share = 90 / 15 = $6.00
Premium = (6.00 # 5.00) / 5.00 = 1 / 5 = 20%
The highest premium is therefore 20% on the bond offer, i.e. option B.
NEW QUESTION # 293
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