QUESTION: 89

CORRECT TEXT

A company's latest accounts show profit after tax of $20.0 million, after deducting interest of $5.0 million. The company expects earnings to grow at 5% per annum indefinitely.

The company has estimated its cost of equity at 12%, which is included in the company WACC of 10%.

Assuming that profit after tax is equivalent to cash flows, what is the value of the equity capital?

Give your answer to the nearest $ million.

$300 million, $300000000

Answer(s): A

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QUESTION: 90

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: 91

A company is financed as follows:

· 400 million $1 shares quoted at $3.00 each.

· $800 million 5% bonds quoted at par.

The company plans to raise $200 million long term debt to finance a project with a net present value of $100 million.

The bank that is providing the debt is insisting on a maximum gearing level covenant.

Gearing will be based on market values and calculated as debt/(debt + equity).

What is the lowest figure for the gearing covenant that the bank could impose without the company breaching the agreement?

Answer(s): B

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QUESTION: 92

A company has 6 million shares in issue. Each share has a market value of $4.00.

$9 million is to be raised using a rights issue.

Two directors disagree on the discount to be offered when the new shares are issued.

· Director A proposes a discount of 25%

· Director B proposes a discount of 30%

Which THREE of the following statements are most likely to be correct?

The theoretical ex-rights price will be higher under Director B's proposal than under Director A's proposal.
More shares will be issued under Director B's proposal than under Director A's proposal.
The rights issue price will be $3.00 under Director A's proposal.
The terms of the rights issue will be one new share for every two existing shares under Director A's proposal.
Shareholder wealth will be higher under Director A's proposal than under Director B's proposal.

Answer(s): B,C,D

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QUESTION: 92