Question 1

The Treasurer of Z intends to use interest rate options to set an interest rate cap on Z’s borrowings. Which of the following statement is correct?

Options :

A : The Treasurer should buy an interested rate floor and sell an interested cap ta the same time

B : The Treasurer will retain the benefit of movcTcnt3 in interest ratc3 below the floor limit.

C : The cost of a collar is lower than the cost of a cap a one.

D : The Treasurer will have to negotiate the options with Z-s Dark

Answer: C

Question 2

A company has a cash surplus which it wishes to distribute to shareholders by a share repurchase rather than

paying a special dividend.

Which THREE of the following statements are correct?

Options :

A : The payment of a special dividend could raise shareholders' expectations of similar distributions in the future, unlike a share repurchase.

B : The share repurchase could send a negative signal to shareholders as it could be interpreted as a failure of management to find suitable investment opportunities

C : Determination of the repurchase price will be easy as shareholders will insist on receiving the open market price

D : Different tax regimes could result in shareholders having a preference for a share repurchase due to the often more preferential tax treatment of capital gains.

E : The share repurchase, if approved by the shareholders, will be binding on all of the company's shareholders.

Answer: A,B,D

Question 3

A company has accumulated a significant amount of excess cash which is not required for investment for the

foreseeable future.

It is currently on deposit, earning negligible returns.

The Board of Directors is considering returning this excess cash to shareholders using a share repurchase

programme.

The majority of shareholders are individuals with small shareholdings.

Which THREE of the following are advantages of the company undertaking a share repurchase programme?

Options :

A : Individual shareholders can realise their investment if they wish.

B : The earnings per share should increase for the shareholders who do not sell their shares.

C : It reduces excess cash which might have been attractive to predators.

D : It reduces the amount of cash for potential future investment opportunities.

E : Institutional investors generally prefer a constant predictable income in the form of dividends.

Answer: A,B,C

Question 4

Company A is planning to acquire Company B at a price of $ 65 million by means of a cash bid.

Company A is confident that the merged entity can achieve the same price earnings ratio as that of Company

A.

What does Company A expect the value of the merged entity to be post acquisition?

Options :

A : $122.5 million

B : $156.0 million

C : $187.5 million

D : $207.0 million

Answer: A

Question 5

A company has 6 million shares in issue. Each share has a market value of $4.00.

$9 million is to be raised using a rights issue.

Two directors disagree on the discount to be offered when the new shares are issued.

• Director A proposes a discount of 25%

• Director B proposes a discount of 30%

Which THREE of the following statements are most likely to be correct?

Options :

A : The theoretical ex-rights price will be higher under Director B-s proposal than under Director A's proposal.

B : More shares will be issued under Director B-s proposal than under Director A-s proposal.

C : The rights issue price will be $3.00 under Director A-s proposal.

D : The terms of the rights issue will be one new share for every two existing shares under Director A's proposal

E : Shareholder wealth will be higher under Director A-s proposal than under Director B-s proposal.

Answer: B,C,D