QUESTION: 121

Company AB was established 6 years ago by two individuals who each own 50% of the shares.

Each individual heads a separate division within the company, which now has annual turnover of GBP10 million and employs 40 people.

Some of the employees are very highly paid as they are important contributors to the company's profitability.

The owners of the company wish to realise the full value of their investment within the next 12 months.

Which TWO of the following options are most likely to be acceptable exit strategies to the two owners of the company?

Initial Public Offering (IPO)
Management Buyout
Sale to a larger competitor
Sale to a Private Equity Investor on an earn-out basis
Spin off (or de-merger)

Answer(s): B,C

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QUESTION: 122

A wholly equity financed company has the following objectives:

1. Increase in profit before interest and tax by at least 10% per year.

2. Maintain a dividend payout ratio of 40% of earnings per year.

Relevant data:

· There are 2 million shares in issue.

· Profit before interest and tax in the last financial year was $5 million.

· The corporate income tax rate is 30%.

At the beginning of the current financial year, the company raised long term debt of $2 million at 10% interest each year.

Calculate the dividend per share that will be announced this year assuming the company achieves its objective of increasing profit before interest and tax by 10%.

$0.74
$0.67
$1.11
$1.01

Answer(s): A

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QUESTION: 123

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: 124

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: 121

QUESTION: 122

QUESTION: 123

QUESTION: 124