CIMA F3 - Financial Strategy

A company plans to cut its dividend but is concerned that the share price will fall.  This demonstrates the _____________  effect

Company A is a large well-established listed entertainment company and Company B is a small unlisted company specializing in providing online media streaming.

Company A has a gearing ratio of 60% (using book values) and interest cover of 2.

Company A is considering making an offer for Company B, either a cash offer financial by raising additional debt finance or a share-for-share exchange.

Which of the following is most likely to occur if Company A offers a share-for exchange rather than offering cash finance by raising debt?

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?

Which THREE of the following remain unchanged over the life of a 10 year fixed rate bond?

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)

The ex div share price of Company A’s shares is $.3.50

An investor in Company A currently holds 2,000 shares.

Company A plans to issue a script divided of 1 new shares for every 10 shares currently held.

After the scrip divided, what will be the total wealth of the shareholder?

Give your answer to the nearest whole $.

A company wishes to raise additional debt finance and is assessing the impact this will have on key ratios. 

The following data currently applies:

   • Profit before interest and tax for the current year is $500,000

   • Long term debt of $300,000 at a fixed interest rate of 5%

   • 250,000 shares in issue with a share price of $8

The company plans to borrow an additional $200,000 on the first day of the year to invest in new project which will improve annual profit before interest and tax by $24,000.

The additional debt would carry an interest rate of 3%.

Assume the number of shares in issue remain constant but the share price will increase to $8.50 after the investment.

The rate of corporate income tax is 30%.

 

After the investment, which of the following statements is correct?

A company is currently all-equity financed.

The directors are planning to raise long term debt to finance a new project.

The debt:equity ratio after the bond issue would be 40:60 based on estimated market values.

 

According to Modigliani and Miller's Theory of Capital Structure without tax, the company's cost of equity would:

Company A is based in Country A where the functional currency is the A$. Currently all sales are to domestic customers in Country A. However, the company is planning to expand internationally by acquiring Company B, a distribution company in Country B, to enable it to sell goods worldwide The functional currency of Country B is the BS

Company A will invoice its international customers in their local currency.

Wage increases in Country B are forecast to be modest, due to high unemployment levels, but overall inflation in Country B is forecast to be significantly higher than in Country A

Which TWO of the following statements about the economic risk of the acquisition of Company B are true?

Which TWO of the following situations offer arbitrage opportunities?

A)

B)

C)

D)