QUESTION: 25

CORRECT TEXT

A listed company follows a policy of paying a constant dividend. The following information is available:

· Issued share capital (nominal value $0.50) $60 million

· Current market capitalisation $480 million

The shareholders are requesting an increased dividend this year as earnings have been growing. However, the directors wish to retain as much cash as possible to fund new investments. They therefore plan to announce a 1-for-10 scrip dividend to replace the usual cash dividend.

Assuming no other influence on share price, what is the expected share price following the scrip dividend?

Give your answer to 2 decimal places.

3.64, 3.63, 3.65

Answer(s): A

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QUESTION: 26

A company plans to raise finance for a new project.

It is considering either the issue of a redeemable cumulative preference share or a Eurobond.

Advise the directors which of the following statements would justify the issue of preference shares over a bond?

Preference shares are not secured against the assets of the business - however, the Eurobond would be.
If profits are poor, dividends do not have to be paid on the preference share - however, interest would need to be paid on the Eurobond.
The issue of the preference share would reduce the company's gearing - however, the Eurobond would increase it.
The company can claim tax relief on the dividend paid on the preference share at a higher rate than the interest paid on the Eurobond.

Answer(s): B

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QUESTION: 27

A listed company is financed by debt and equity.

If it increases the proportion of debt in its capital structure it would be in danger of breaching a debt covenant imposed by one of its lenders.

The following data is relevant:

The company now requires $800 million additional funding for a major expansion programme.

Which of the following is the most appropriate as a source of finance for this expansion programme?

Retained earnings
Private placement of a bond
Rights issue
Bank overdraft

Answer(s): C

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QUESTION: 28

Company T has 1,000 million shares in issue with a current share price of $10 each.

Company V has 300 million shares in issue with a current share price of $5 each.

Company T is considering acquiring Company V.

Total synergy gains of $100 million have been estimated.

The purchase of Company V's shares would be by cash at a 10% premium above the current share price.

In seeking approval for the acquisition, the likely reaction from T's shareholders will be:

accepted as there is $100 million of synergy which will all go to T's shareholders.
accepted as there will be an increase in the value of the business of $1,500 million.
rejected as T's shareholders will see a decrease in their wealth overall of $50 million.
rejected as T's shareholders will not be willing to pay more than $1,500 million for V.

Answer(s): C

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QUESTION: 25

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QUESTION: 28