QUESTION: 53

A large, listed company in the food and household goods industry needs to raise $50 million for a period of up to 6 months.

It has an excellent credit rating and there is almost no risk of the company defaulting on the borrowings. The company already has a commercial paper programme in place and has a good relationship with its bank.

Which of the following is likely to be the most cost effective method of borrowing the money?

Bank overdraft
6 month term loan
Treasury Bills
Commercial paper

Answer(s): D

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QUESTION: 54

A company needs to raise $20 million to finance a project.

It has decided on a rights issue at a discount of 20% to its current market share price.

There are currently 20 million shares in issue with a nominal value of $1 and a market price of $5 per share.

Calculate the terms of the rights issue.

1 new share for every 4 existing shares
1 new share for every 20 existing shares
1 new share for every 5 existing shares
1 new share for every 25 existing shares

Answer(s): A

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QUESTION: 55

A company's current earnings before interest and taxation are $5 million.

These are expected to remain constant for the forseeable future.

The company has 10 million shares in issue which currently trade at $3.60.

It also has a $10 million long term floating rate loan.

The current interest rate on this loan is 5%.

The company pays tax at 20%.

The company expects interest rates to increase next year to 6% and it's Price/Earnings (P/E) ratio to move to 9.5 times by the end of next year.

What percentage reduction in the share price will occur by the end of next year if the interest rate increase and the P/E movement both occur?

Reduction of 7%
Reduction of 5%
Reduction of 1%
Reduction of 0%

Answer(s): A

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QUESTION: 56

Listed company R is in the process of making a cash offer for the equity of unlisted company S.

Company R has a market capitalisation of $200 million and a price/earnings ratio of 10.

Company S has a market capitalisation of $50 million and earnings of $7 million.

Company R intends to offer $60 million and expects to be able to realise synergistic benefits of $20 million by combining the two businesses. This estimate excludes the estimated $8 million cost of integrating the two businesses.

Which of the following figures need to be used when calculating the value of the combined entity in $ millions?

8, 20, 50, 60, 200
8, 20, 50, 200
20, 50, 60, 200
7, 10, 20, 50, 200

Answer(s): A

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QUESTION: 53

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