QUESTION: 113

A company's Board of Directors is assessing the likely impact of financing future new projects using either equity or debt.

The directors are uncertain of the effects on key variables.

Which THREE of the following statements are true?

The choice between using either equity or debt will have no impact on the amount of corporate income tax payable.
Retained earnings has no cost, and is therefore the cheapest form of equity finance.
Debt finance is always preferable to equity finance.
Debt finance will increase the cost of equity.
Equity finance will reduce the overall financial risk.
Equity finance will increase pressure to pay a higher total future dividend.

Answer(s): D,E,F

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QUESTION: 114

Which THREE of the following are the most likely exit routes that apply to a venture capitalist?

Flotation via a stock market listing
Trade sale to another company
Selling back to the original owners
Liquidation of the company
Raising long term debt from the company

Answer(s): A,B,C

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QUESTION: 115

A company is based in Country Y whose functional currency is Y$. It has an investment in Country Z whose functional currency is Z$.

This year the company expects to generate Z$ 10 million profit after tax.

Tax Regime:

· Corporate income tax rate in country Y is 50%

· Corporate income tax rate in country Z is 20%

· Full double tax relief is available

Assume an exchange rate of Y$ 1 = Z$ 5.

What is the expected profit after tax in Y$ if the Z$ profit is remitted to Country Y?

Y$ 1.25 million
Y$ 1.00 million
Y$ 31.25 million
Y$ 4.00 million

Answer(s): A

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QUESTION: 116

A listed company in the retail sector has accumulated excess cash.

In recent years, it has experienced uncertainly with forecasting the required level of cash for capital expenditure due to unpredictable economic cycles.

Its excess cash is on deposit earning negligible returns.

The Board of Directors is considering the company's dividend policy, and the need to retain cash in the company.

Which THREE of the following are advantages of retaining excess cash in the company?

Retaining excess cash may make the company vulnerable to hostile takeover.
The excess cash is earning a negligible return.
The company will be in a position to respond promptly to unexpected investment opportunities.
Liquidity problems are less likely to be experienced if there is a downturn in business.
The market may interpret the return of excess cash as a sign of weak growth prospects.

Answer(s): C,D,E

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QUESTION: 116