CIMA F3 - Financial Strategy

When valuing an unlisted company, a P/E ratio for a similar listed company may be used but adjustments to the P/E ratio may be necessary.

 

Which THREE of the following factors would justify a reduction in the proxy p/e ratio before use? 

Company C is a listed company. It is currently considering the acquisition of Company D. The original founder of Company C currently owns 52% of the shares.

Alternative forms of consideration for Company D being considered are as follows:

• Cash payment, financed by new borrowing

• issue of new shares in Company C

Which of the following is an advantage of a cash offer over a share-for exchange from the viewpoint of the original founder of Company C?

A company plans to raise $12 million to finance an expansion project using a rights issue.

Relevant data:

• Shares will be offered at a 20% discount to the present market price of $15.00 per share.

• There are currently 2 million shares in issue.

• The project is forecast to yield a positive NPV of $6 million.

What is the yield-adjusted Theoretical Ex-Rights Price following the announcement of the rights issue?

Company A operates in country A and uses currency AS. It is looking to acquire Company B which operates in country B and uses currency B$. The following information is relevant:

The assistant accountant at Company A has prepared the following valuation of company B's equity, however there are some errors in his calculations.

Value of Company B's equity = 14.16 + 16.03 + 17.67 = AS47.86 million

Company B has BS5 million of debt finance.

Which of the following THREE statements are true?

Company AB was established 6 years ago by two individuals who each own 50% of the shares.

Each individual heads a separate division within the company, which now has annual turnover of GBP10 million and employs 40 people.

Some of the employees are very highly paid as they are important contributors to the company's profitability.

The owners of the company wish to realise the full value of their investment within the next 12 months.

 

Which TWO of the following options are most likely to be acceptable exit strategies to the two owners of the company?

A private company manufactures goods for export, the goods are priced in foreign currency B$.  

The company is partly owned by members of the founding family and partly by a venture capitalist who is helping to grow the business rapidly in preparation for a planned listing in three years' time.  

The company therefore has significant long term exposure to the B$. 

This exposure is hedged up to 24 months into the future based on highly probable forecast future revenue streams.  

The company does not apply hedge accounting and this has led to high volatility in reported earnings. 

 

Which of the following best explains why external consultants have recently advised the company to apply hedge accounting?

A listed entertainment and media company produces and distributes films globally. The company invests heavily in intellectual property in order to create the scope for future film projects. The company has five separate distribution companies, each managed as a separate business unit The company is seeking to sell one of its business units in a management buy-out (MBO) to enable it to raise finance for proposed new investments

The business unit managers have been in discussions with a bank and venture capitalists regarding the financing for the MBO The venture capitalists are only prepared to invest a mixture of debt and equity and have suggested the following:

The venture capitalists have stated that they expect a minimum return on their equity investment of 3Q°/o a year on a compound basis over the first 5 years of the MBO No dividends will be paid during this period.

Advise the MBO team of the total amount due to the venture capitalist over the 5-year period to satisfy their total minimum return?

Company Z wishes to borrow $50 million for 10 years at a fixed rate of interest.

 

Two alternative approaches are being considered:

   A. Issue a 10 year bond at a fixed rate of 6%, or

   B. Borrow from the bank at Libor +2.5% for a 10 year period and simultaneously enter into a 10 year interest rate swap.

 

Current 10 year swap rates against Libor are 4.0% - 4.2%.

 

What is the difference in the net interest cost between the two alternative approaches?

Under traditional theory, an increase in a company's WACC would cause the value of the company to:

A company has:

   • $6 million market value of equity

   • $4 million market value of debt 

   • WACC of 11.04%

   • Corporate income tax rate of 20%

According to Modigliani and Miller's theory of capital structure with tax, what is the ungeared cost of equity?