QUESTION: 101

Company A has made an offer to take over all the shares in Company B on the following terms:

· For every 20 shares currently held, Company B's shareholders will receive $100 bond with a coupon rate of 3%

· The bond will be repaid in 10 years' time at its par value of $100.

· The current yield on 10 year bonds of similar risk is 6%.

What is the effective offer price per share being made to Company B's shareholders?

$6.43
$4.50
$3.89
$6.89

Answer(s): C

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QUESTION: 102

A listed company is planning a share repurchase.

The following data applies:

· There are 10 million shares in issue

· The share repurchase will involve buying back 20% of the shares at a price of $0.75

· The company is holding $2 million cash

· Earnings for the current year ended are $2 million

The Directors are concerned about the impact that this repurchase programme will have on the company's cash balance and current year earnings per share (EPS) ratio.

Advise the directors which of the following statements is correct?

The cash balance will decrease by 75% and EPS will decrease by 25%.
The cash balance will decrease by 75% and EPS will increase by 25%.
The cash balance will decrease by 20% and the EPS will decrease by 25%.
The cash balance will decrease by 20% and the EPS will increase by 25%.

Answer(s): B

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QUESTION: 103

A company is currently all-equity financed.

The directors are planning to raise long term debt to finance a new project.

The debt:equity ratio after the bond issue would be 30:60 based on estimated market values.

According to Modigliani and Miller's Theory of Capital Structure without tax, the company's cost of equity would:

stay the same.
decrease.
increase.
increase or decrease depending on the bond's coupon rate.

Answer(s): C

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QUESTION: 104

A company is concerned about the interest rate that it will be required to pay on a planned bond issue.

It is considering issuing bonds with warrants attached.

Advise the directors which of the following statements about warrants is NOT correct?

Warrants are a debt sweetener attached to the bond to drive down the interest rate payable on the bond.
Warrants give the holder the right to buy ordinary shares in the company at a fixed price at a future date.
Warrants can be sold back to the issuing company for the nominal value of the share if no longer required by the bond holder.
Warrants can potentially be very expensive because they can involve the issue of shares at a discount in the future if exercised.

Answer(s): C

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QUESTION: 101

QUESTION: 102

QUESTION: 103

QUESTION: 104