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| Section | Weight | Objectives |
|---|---|---|
| Topic 1: Sources of Long-Term Finance | 25% | - Optimal capital structure
|
| Topic 2: Financial Policy Decisions | 15% | - Dividend and distribution policy
|
| Topic 3: Business Valuation | 20% | - Pricing and negotiation
|
| Topic 4: Investment Appraisal and Decisions | 25% | - Advanced investment appraisal techniques
|
| Topic 5: Financial Risk Management | 15% | - Types and sources of financial risk
|
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NEW QUESTION # 77
A listed company is planning a share repurchase.
The following data applies
* There are 20 million shares in issue
* The share repurchase will involve buying back 10% of the shares at a price of $1.20
* The company is holding $4.8 million cash
* Earnings for the current year ended are $3.6 million
The Directors are concerned about the impact that this repurchase programme will have on the company's cash balance and current year earnings per share (EPS) ratio.
Advise the directors which of the following statements is correct?
Answer: D
Explanation:
Shares repurchased: 10% × 20m = 2m shares at $1.20 # cash outflow = $2.4m.
Cash balance falls from $4.8m to $2.4m # 50% decrease.
EPS before: 3.6m / 20m = $0.18
EPS after: 3.6m / 18m = $0.20
% change in EPS = (0.20 # 0.18) / 0.18 # 11% increase.
So the correct statement is D: cash decreases by 50% and EPS increases by 11%.
NEW QUESTION # 78
A company wishes to raise new finance using a rights issue. The following data applies:
* There are 20 million shares in issue with a market value of $6 each
* The terms of the rights will be 1 new share for 4 existing shares held
* After the rights issue, the theoretical ex-rights price (TERP) will be $5.75 Assuming all shareholders take up their rights, how much new finance will be raised ?
Give your answer to one decimal place.
Answer:
Explanation:
$ ? million
7.5, 7.50Workings:Existing shares = 20m at $6 # current value = 20m × 6 = $120mRights: 1 new for 4 existing # New shares = 20m / 4 = 5mTotal shares after issue = 20m + 5m = 25mTERP after issue = $5.75Use TERP to back out funds raised (X):120+X25=5.75\frac{120 + X}{25} = 5.7525120+X=5.75 120+X=25×5.
75=143.75120 + X = 25 \times 5.75 = 143.75120+X=25×5.75=143.75 X=143.75#120=23.75 millionX =
143.75 - 120 = 23.75 \text{ million}X=143.75#120=23.75 million Rounded to 1 decimal place: $23.8 million
NEW QUESTION # 79
LPM Company is based in Country C. whose currency is the CS
It has entered Into a contract to buy a machine in three months' time. The supplier is overseas and the payment is to be made in a different currency from the CS The treasurer at LPM Company is considering using a money market hedge to manage the transaction risk associated with a payment.
The assumptions of interest rate parity apply
Which THREE of the following statements concerning the use of a money market hedge for this supplier payment are correct?
Answer: A,C,D
Explanation:
A). Any opportunity to benefit from future exchange rate movements is lost.
True - a money market hedge locks in the effective exchange rate now, so you remove both downside risk and upside potential.
B). It can be tailored to match the size of the payment.
True - you can structure the borrowing/lending and FX transaction to exactly match the foreign currency amount due.
C). It manages transaction risk.
True - transaction risk (uncertainty in the home currency value of a known future foreign-currency cash flow) is what a money market hedge directly addresses.
D). It offers a significantly better outcome than a forward contract.
False - under interest rate parity, a money market hedge and a forward contract should give similar effective rates (ignoring spreads and costs).
E). It avoids the need to find immediate finance.
False - for a payable, you normally borrow or use cash now as part of the hedge, so it does not avoid immediate financing; it actually requires it.
NEW QUESTION # 80
Company ABC is planning to bid for company DDD, an unlisted company in an unrelated industry sector to ABC.
The directors of ABC are considering a number of different valuation methods for DDD before making a bid.
Which of the following is the MOST appropriate method for ABC to use to value DDD?
Answer: A
Explanation:
Applying an industry P/E ratio to DDD's forecast earnings.
NEW QUESTION # 81
The two founding directors of an unlisted geared company want to establish its value as they are intending to approach a venture capitalist for additional funding.
The funding will be used to invest in a major new project which has very high growth potential. The directors intend to sell 10% of the company to the venture capitalist They have prepared the following current valuation of the company using the divided valuation model:
The following information is relevant.
* $60,000 is the most recent dividend paid.
* 4% is the average dividend growth over the last few years.
* 10% is an estimate of the company's cost of equity using the CAPM model with the industry average asset beta Which THREE of the following are weaknesses of the valuation method used in these circumstances?
Answer: B,C,D
NEW QUESTION # 82
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