QUESTION: 65

A company has in a 5% corporate bond in issue on which there are two loan covenants.

· Interest cover must not fall below 3 times

· Retained earnings for the year must not fall below $3.5 million

The Company has 200 million shares in issue.

The most recent dividend per share was $0.04.

The Company intends increasing dividends by 10% next year.

Financial projections for next year are as follows:

Advise the Board of Directors which of the following will be the status of compliance with the loan covenants next year?

The company will be in compliance with both covenants.
The company will be in breach of both covenants.
The company will breach the covenant in respect of retained earnings only.
The company will be in breach of the covenant in respect of interest cover only.

Answer(s): C

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QUESTION: 66

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: 67

Two listed companies in the same industry are joining together through a merger.

What are the likely outcomes that will occur after the merger has happened?

Select ALL that apply.

Increase in customer base.
Competition authorities step in to stop a potential price monopoly.
Decrease in employee motivation due to internal changes.
Changes to supplier relationships owing to internal changes.
Cost savings from synergistic benefits and economies of scale.

Answer(s): A,C,D,E

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QUESTION: 68

Company M is a listed company in a highly technical service industry.

The directors are considering making a cash offer for the shares in Company Q, an unquoted company in the same industry.

Relevant data about Company Q:

· The company has seen consistent growth in earnings each year since it was founded

10 years ago.

· It has relatively few non-current assets.

· Many of the employees are leading experts in their field. A recent exercise suggested that the value of the company's human capital exceeded the value of its tangible assets.

The directors and major shareholders of Company Q have indicated willingness to sell the company.

Before negotiations become too advanced, the directors of Company M are considering the benefits to their company that would follow the acquisition.

Which THREE of the following are the most likely benefits of the acquisition to Company M's shareholders?

Access to technical expertise.
Reduction of risk through diversification.
Improved asset backing for borrowing due to the acquisition of intangible assets.
Gain economies of scale.
Improve earnings per share (EPS).

Answer(s): A,D,E

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QUESTION: 65

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QUESTION: 68