QUESTION: 77

CORRECT TEXT

A company is planning to repurchase some of its shares. Relevant details are as follows:

· 100 million shares in issue

· Current share price $5

· 5 million shares to be repurchased

· 10% repurchase premium

· Repurchased shares to be cancelled

What would you expect the share price after the repurchase to be?

Give your answer to two decimal places.

$4.97, $4.98

Answer(s): A

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QUESTION: 78

A listed company has recently announced a profit warning.

The company's share price fell 20% on the day of the announcement but had been fairly static in the weeks leading up to the announcement.

Which form of efficient market is most likely to be indicated by this share price movement?

Weak form
Semi-strong form
Strong form
Random walk

Answer(s): B

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QUESTION: 79

A listed publishing company owns a subsidiary company whose business activity is training.

It wishes to dispose of the subsidiary company.

The following information is available:

The board of the publishing company believe that the value of the subsidiary company, and hence the value of the equity invested in it, can be determined by calculating the present value of the subsidiary's free cashflows.

Which of the following is the most appropriate discount rate to use when determining the enterprise value of the company?

A WACC that reflects the gearing of the publishing company and the asset beta of a listed company that provides training activities.
A cost of equity that reflects the asset beta of a listed company that provides training activities.
A WACC that reflects the gearing of the subsidiary company and the asset beta of a listed company that provides training activities.
A WACC that the reflects the gearing of the publishing company and the equity beta factor of the publishing company.

Answer(s): A

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QUESTION: 80

A company has forecast the following results for the next financial year:

The following is also relevant:

· Profit after tax for the year can be assumed to be equivalent to free cash flow for the year.

· Debt finance comprises a $10 million floating rate loan which currently carries an interest rate of 5%.

· $400,000 investment in non-current assets is required to achieve required growth, all of which is to financed from next year's free cash flow.

· The company plans to pay a dividend of $150,000 next year, financed from next year's free cash flow.

The company is concerned that interest rates could rise next year to 6% which could then affect their investment plans.

If interest rates were to rise to 6% and the company wishes to maintain its dividend amount, the planned investment expenditure will decrease by:

$25,000
$75,000
$50,000
$100,000

Answer(s): A

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QUESTION: 80