QUESTION: 5

Company T is a listed company in the retail sector.

Its current profit before interest and taxation is $5 million.

This level of profit is forecast to be maintainable in future.

Company T has a 10% corporate bond in issue with a nominal value of $10 million.

This currently trades at 90% of its nominal value.

Corporate tax is paid at 20%.

The following information is available:

Which of the following is a reasonable expectation of the equity value in the event of an attempted takeover?

$32.0 million
$41.6 million
$65.0 million
$50.2 million

Answer(s): B

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QUESTION: 6

A private company manufactures goods for export, the goods are priced in foreign currency B$.

The company is partly owned by members of the founding family and partly by a venture capitalist who is helping to grow the business rapidly in preparation for a planned listing in three years' time.

The company therefore has significant long term exposure to the B$.

This exposure is hedged up to 24 months into the future based on highly probable forecast future revenue streams.

The company does not apply hedge accounting and this has led to high volatility in reported earnings.

Which of the following best explains why external consultants have recently advised the company to apply hedge accounting?

To provide a more appropriate earnings figure for use in calculating the annual dividend.
To make it easier for the market to value the business when it is listed on the Stock Exchange.
To ensure that the venture capitalist receives regular annual returns on its investment.
To fully adopt IFRS in preparation for listing the company.

Answer(s): B

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QUESTION: 7

Which of the following statements best describes a residual dividend policy?

Dividends are paid only after the on-going operational needs of the business have been met.
Dividends are paid only if no further positive NPV projects are available.
All surplus earnings are invested back into the business.
Dividends are paid at a constant rate.

Answer(s): B

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QUESTION: 8

The Board of Directors of a small listed company engaged in exploration are currently considering the future dividend policy of the company. Exploration is considered a high-risk business and consequently the company has a low level of debt finance.

Forecasts indicate a period of profit fluctuation in the next few years as the company is planning to embark on a major capital investment project. Debt finance is unlikely to be available due to the project's high business risk.

Which THREE of the following are practical considerations when determining the company's dividend/retention policy?

The timing and size of the cash flow requirements for the new investment.
The fluctuating nature of the projected future profits.
The legislation and regulation governing distributable profits.
The dividend policies of mature listed multinational companies in the exploration industry.
The general level of interest rates and the tax savings on interest costs relating to debt finance.

Answer(s): A,B,C

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QUESTION: 5

QUESTION: 6

QUESTION: 7

QUESTION: 8