QUESTION: 9

Hospital X provides free healthcare to all members of the community, funded by the central Government.

Hospital Y provides healthcare which has to be paid for by the individual patients. It is a listed company, owned by a large number of shareholders.

In comparing the above two organisations and their objectives, which THREE of the following statements are correct?

X is a not-for-profit organisation while Y is a for-profit organisation.
X and Y have the same primary financial objective - to maximise shareholder wealth.
The performance of X will be appraised primarily on the basis of value for money.
Only Y is likely to have a mixture of financial and non-financial objectives.
X and Y will have the same primary non financial objective - provision of quality of health care.

Answer(s): A,C,E

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QUESTION: 10

Company M's current profit before interest and taxation is $5.0 million.

It has a long-term 10% corporate bond in issue with a nominal value of $10 million.

The rate of corporate tax is 25%.

It plans to continue to pay out 50% of its earnings in dividends and earnings are expected to grow by 3% each year in perpetuity.

Its cost of equity is 10%.

Using the dividend growth model, advise the Board of Directors of Company M which of the following provide a reasonable valuation of Company M's equity?

$73.6 million
$22.1 million
$44.1 million
$50.1 million

Answer(s): B

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QUESTION: 11

Company C has received an unwelcome takeover bid from Company P.

Company P is approximately twice the size of Company C based on market capitalisation.

Although the two companies have some common business interests, the main aim of the bid is diversification for Company P.

The offer from Company P is a share exchange of 2 shares in Company P for 3 shares in Company C.

There is a cash alternative of $5.50 for each Company C share.

Company C has substantial cash balances which the directors were planning to use to fund an acquisition.

These plans have not been announced to the market.

The following share price information is relevant. All prices are in $.

Which of the following would be the most appropriate action by Company C's directors following receipt of this hostile bid?

Write to shareholders explaining fully why the company's share price is under valued.
Change the Articles of Association to increase the percentage of shareholder votes required to approve a takeover.
Pay a one-off special dividend.
Refer the bid to the country's competition authorities.

Answer(s): A

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QUESTION: 12

Which of the following statements about IFRS 7 Financial Instruments: Disclosures is true?

IFRS 7
only applies to entities that are designated as financial institutions by a regulatory authority.
IFRS 7 requires disclosures to be given for each separate class of financial instruments.
The main requirement of IFRS 7 is for qualitative disclosures relating to financial instruments and market risks.
IFRS 7 requires sensitivity analysis in relation to credit risk.

Answer(s): B

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