QUESTION: 17

LM has made the following share purchases during the year:
- Purchased 55% of the equity share capital of OP.
- Purchased 45% of the equity share capital of QR. LM have the power to appoint the majority of board members on the QR board.
- Purchased 30% of the equity share capital of ST. LM is represented by one director on the main board of ST which has five members in total. The other 70% of ST's equity share capital is owned by a single company, UV.
The Managing Director has told you that OP has performed well, but both QR and ST have not performed as expected. He is therefore pleased that OP will be included as a subsidiary and that QR and ST will only be included as investments in the group financial statements. In accordance with the ethical principle of professional competence and due care how should the investments in OP, QR and ST be treated in the group financial statements?

OP and QR should be consolidated and ST should be equity accounted.
OP should be consolidated and QR and ST should be equity accounted.
OP should be consolidated, QR should be equity accounted and ST should be valued at cost.
OP and QR should be equity accounted and ST should be valued at cost.

Answer(s): A

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QUESTION: 18

LM are just about to pay a dividend of 20 cents a share. Historically, dividends have grown at a rate of 5% each year.
The current share price is $3.05.
The cost of equity using the dividend valuation model is:

12.4%
11.9%
7.4%
6.9%

Answer(s): A

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QUESTION: 19

KL issued $100,000 of 6% convertible debentures at par on 1 January 20X7. These debentures are redeemable at par or can be converted into 5 shares for each $100 of nominal value of debentures on 31 December 20X9.
The share price on 1 January 20X7 is $18 a share. The share price is expected to grow at a rate of 7% a year.
The expected redemption value for each $100 nominal value of debentures on the date of conversion is:

$110.25
$103.04
$100.00
$90.00

Answer(s): A

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QUESTION: 20

JK is seeking to raise new finance through a rights issue of equity shares.
Which THREE of the following statements are correct?

The administration costs associated with a rights issue are higher than those for an initial public offering.
Shareholders must pay the full market price for shares offered in a rights issue.
An alternative name for a rights issue is a scrip issue of shares.
A rights issue will dilute an existing shareholder's control of the entity if they do not take up their rights.
Entities have the opportunity to underwrite a rights issue.
Shareholders' entitlement to rights may be sold on their behalf.

Answer(s): D,E,F

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