The owners of a private company wish to dispose of their entire investment in the company. The company has an issued share capital of $1m of $0·50 nominal value ordinary shares. The owners have made the following valuations of the company’s assets and liabilities.
The net realisable value of the non-current assets exceeds their book value by $4m. The current assets include $2m of accounts receivable which are thought to be irrecoverable. What is the minimum price per share which the owners should accept for the company?
Which of the following financial instruments will NOT be traded on a money market?
B.Convertible loan notes
D.Certificates of deposit
Andrew Co is a large listed company financed by both equity and debt.
In which of the following areas of financial management will the impact of working capital management be smallest?
B.Interest rate management
C.Management of relationship with the bank
Which of the following are descriptions of basis risk?
(1) It is the difference between the spot exchange rate and currency futures exchange rate
(2) It is the possibility that the movements in the currency futures price and spot price will be different
(3) It is the difference between fixed and floating interest rates
(4) It is one of the reasons for an imperfect currency futures hedge
B.1 and 3
C.2 and 4 only
D.2, 3 and 4
Crag Co has sales of $200m per year and the gross profit margin is 40%. Finished goods inventory days vary throughout the year within the following range:
All purchases and sales are made on a cash basis and no inventory of raw materials or work in progress is carried. Crag Co intends to finance permanent current assets with equity and fluctuating current assets with its overdraft.
In relation to finished goods inventory and assuming a 360-day year, how much finance will be needed from the overdraft?
In relation to an irredeemable security paying a fixed rate of interest, which of the following statements is correct?
A.As risk rises, the market value of the security will fall to ensure that investors receive an increased yield
B.As risk rises, the market value of the security will fall to ensure that investors receive a reduced yield
C.As risk rises, the market value of the security will rise to ensure that investors receive an increased yield
D.As risk rises, the market value of the security will rise to ensure that investors receive a reduced yield
Pop Co is switching from using mainly long-term fixed rate finance to fund its working capital to using mainly short-term variable rate finance.
Which of the following statements about the change in Pop Co’s working capital financing policy is true?
A.Finance costs will increase
B.Re-financing risk will increase
C.Interest rate risk will decrease
D.Overcapitalisation risk will decrease
In relation to an operating lease, which of the following statements is correct?
A.All the risks and rewards of ownership transfer to the lessee
B.The asset and lease obligation will be recorded in the statement of financial position
C.The lease period will cover almost all of the leased asset’s useful economic life
D.The lessor will be responsible for repairs and maintenance of the leased asset
A company has annual after-tax cash flows of $2 million per year which are expected to continue in perpetuity. The company has a cost of equity of 10%, a before-tax cost of debt of 5% and an after-tax weighted average cost of capital of 8% per year. Corporation tax is 20%.
What is the theoretical value of the company?
Which of the following would you expect to be the responsibility of financial management?
A.Producing annual accounts
B.Producing monthly management accounts
C.Advising on investment in non-current assets
D.Deciding pay rates for staff
The following scenario relates to questions 1 to 5.
Herd Co is based in a country whose currency is the dollar ($). The company expects to receive €1,500,000 in six months’ time from Find Co, a foreign customer. The finance director of Herd Co is concerned that the euro (€) may depreciate against the dollar before the foreign customer makes payment and she is looking at hedging the receipt.
Herd Co has in issue loan notes with a total nominal value of $4 million which can be redeemed in 10 years’ time. The interest paid on the loan notes is at a variable rate linked to LIBOR. The finance director of Herd Co believes that interest rates may increase in the near future.
The spot exchange rate is €1·543 per $1. The domestic short-term interest rate is 2% per year, while the foreign short-term interest rate is 5% per year.
What is the six-month forward exchange rate predicted by interest rate parity?
A.€1·499 per $1
B.€1·520 per $1
C.€1·566 per $1
D.€1·588 per $1
As regards the euro receipt, what is the primary nature of the risk faced by Herd Co?
Which of the following hedging methods will NOT be suitable for hedging the euro receipt?
A.Forward exchange contract
B.Money market hedge
Which of the following statements support the finance director’s belief that the euro will depreciate against the dollar?
(1) The dollar inflation rate is greater than the euro inflation rate
(2) The dollar nominal interest rate is less than the euro nominal interest rate
C.Both 1 and 2
D.Neither 1 nor 2
As regards the interest rate risk faced by Herd Co, which of the following statements is correct?
A.In exchange for a premium, Herd Co could hedge its interest rate risk by buying interest rate options
B.Buying a floor will give Herd Co a hedge against interest rate increases
C.Herd Co can hedge its interest rate risk by buying interest rate futures now in order to sell them at a future date
D.Taking out a variable rate overdraft will allow Herd Co to hedge the interest rate risk through matching
The following scenario relates to questions 6 to 10.
Ring Co has in issue ordinary shares with a nominal value of $0·25 per share. These shares are traded on an efficient capital market. It is now 20X6 and the company has just paid a dividend of $0·450 per share. Recent dividends of the company are as follows:
Ring Co also has in issue loan notes which are redeemable in seven years’ time at their nominal value of $100 per loan note and which pay interest of 6% per year.
The finance director of Ring Co wishes to determine the value of the company.
Ring Co has a cost of equity of 10% per year and a before-tax cost of debt of 4% per year. The company pays corporation tax of 25% per year.
Using the dividend growth model, what is the market value of each ordinary share?
What is the market value of each loan note?
The finance director of Ring Co has been advised to calculate the net asset value (NAV) of the company.
Which of the following formulae calculates correctly the NAV of Ring Co?
A.Total assets less current liabilities
B.Non-current assets plus net current assets
C.Non-current assets plus current assets less total liabilities
D.Non-current assets less net current assets less non-current liabilities
Which of the following statements about valuation methods is true?
A.The earnings yield method multiplies earnings by the earnings yield
B.The equity market value is number of shares multiplied by share price, plus the market value of debt
C.The dividend valuation model makes the unreasonable assumption that average dividend growth is constant
D.The price/earnings ratio method divides earnings by the price/earnings ratio
Which of the following statements about capital market efficiency is/are correct?
(1) Insider information cannot be used to make abnormal gains in a strong form. efficient capital market
(2) In a weak form. efficient capital market, Ring Co’s share price reacts to new information the day after it is announced
(3) Ring Co’s share price reacts quickly and accurately to newly-released information in a semi-strong form. efficient capital market
A.1 and 2 only
B.1 and 3 only
D.1, 2 and 3