Question 1

A company's current profit before interest and taxation is $1.1 million and it is expected to remain constant for

the foreseeable future.

The company has 4 million shares in issue on which the earnings yield is currently 10%. It also has a $2

million bond in issue with a fixed interest rate of 5%.

The corporate income tax rate is 20% and is expected to remain unchanged.

Which of the following is the best estimate of the current share price?

Options :

A : $2.75

B : $2.50

C : $2.00

D : $1.10

Answer: C

Question 2

An analyst has valued a company using the free cash flow valuation model.

The analyst used the following data in determining the value:

• Estimated free cashflow in 1 year's time = $100,000

• Estimated growth in free cashflow after the first year = 5?ch year indefinitely

• Appropriate cost of equity = 10%

The result produced by the analyst was as follows:

Value of equity = $100,000 (1+0.05)/0.10 = $1,050,000

The analyst made a number of errors in determining the value.

By how much has the analyst undervalued the company?

Options :

A : $950,000

B : $2,000,000

C : $2,100,000

D : $1,050,000

Answer: A

Question 3

An unlisted company operates in a niche market, exploring the west coast of Africa for new oiI reservoirs.

The oil exploration program has been successful in recent years and t now has a substantial amount of oil

reserves with a high level of certainty of being recoverable Under financial reporting regulations, oil still in the

ground is not recognised as an asset unit is extracted.

The expense of the exploration program has used up all the company’s available cash resources.

The company has denied to list or a stock market and raise finds through an initial public offering to finance

its drilling program.

Which of the following valuation methods in the appropriate to use in calculating an initial listing price for this

company?

Options :

A : Market capitalisation.

B : Framings valuation using the ratio of a multinational oil exploration company

C : Net asset valuation based on book values.

D : Discounted cash flow valuation

Answer: D

Question 4

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?

Options :

A : The relative lack of marketability of unlisted company shares.

B : A lower level of scrutiny and regulation for unlisted companies.

C : Unlisted companies being generally smaller and less established.

D : Control premium not being included within the proxy p/e ratio used.

E : The forecast earnings growth being relatively higher in the unlisted company.

F : A profit item within the unlisted company-s latest earnings which will not reoccur.

Answer: A,B,C

Question 5

For which THREE of the following risk categories does IFRS 7 require sensitivity analysis?

Options :

A : Currency risk

B : Liquidity risk

C : Interest rate risk

D : Commodity risk

E : Credit risk

F : Supply chain risk

Answer: A,C,D