Question 1

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 2

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 3

A company has a covenant on its 5% long term corporate bond.

• Covenant - The earnings must not fall below $7 million

The bond has a nominal value of $60 million.

It is currently trading at 80% of its nominal value.

The projected earnings before interest and taxation for next year are $11.5 million.

The company retains 80% of its earnings. It pays tax at 20%.

Advise the Board of Directors which of the following covenant conditions will apply next year?

Options :

A : The earnings will be = $7.28 million (The covenant will not be breached).

B : The earnings will be = $11.50 million (The covenant will not be breached).

C : The earnings will be = $6.80 million (The covenant will be breached).

D : The earnings will be = $5.44 million (The covenant will be breached).

Answer: C

Question 4

A company based in Country D, whose currency is the D$, has an objective of maintaining an operating profit

margin of at least 10?ch year.

Relevant data:

• The company makes sales to Country E whose currency is the E$. It also makes sales to Country F whose

currency is the F$.

• All purchases are from Country G whose currency is the G$.

• The settlement of all transactions is in the currency of the customer or supplier.

Which of the following changes would be most likely to help the company achieve its objective?

Options :

A : The D$ strengthens against the E$ over time.

B : The F$ weakens against the D$ over time.

C : The D$ strengthens against the G$ over time.

D : The D$ weakens against the G$ over time.

Answer: C

Question 5

A listed company is financed by debt and equity.

If it increases the proportion of debt in its capital structure it would be in danger of breaching a debt covenant

imposed by one of its lenders.

The following data is relevant:

The company now requires $800 million additional funding for a major expansion programme.

Which of the following is the most appropriate as a source of finance for this expansion programme?

Options :

A : Retained earnings

B : Private placement of a bond

C : Rights issue

D : Bank overdraft

Answer: C