QUESTION: 33

An all equity financed company reported earnings for the year ending 31 December 20X1 of $5 million.

One of its financial objectives is to increase earnings by 5% each year.

In the year ending 31 December 20X2 it financed a project by issuing a bond with a $1 million nominal value and a coupon rate of 7%.

The company pays corporate income tax at 30%.

If the company is to achieve its earnings target for the year ending 31 December 20X2, what is the minimum operating profit (profit before interest and tax) that it must achieve?

$5.25 million
$7.50 million
$7.57 million
$8.40 million

Answer(s): C

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QUESTION: 34

Which THREE of the following non-financial objectives would be most appropriate for a listed company in the food retailing industry?

Reduce customer complaints
Increase customer service quality
Reduce production time
Improve staff morale
Reduce raw material wastage

Answer(s): A,B,D

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QUESTION: 35

A company has a financial objective of maintaining a gearing ratio of between 30% and 40%, where gearing is defined as debt/equity at market values.

The company has been affected by a recent economic downturn leading to a shortage of liquidity and a fall in the share price during 20X1.

On 31 December 20X1 the company was funded by:

· Share capital of 4 million $1 shares trading at $4.0 per share.

· Debt of $7 million floating rate borrowings.

The directors plan to raise $2 million additional borrowings in order to improve liquidity.

They expect this to reassure investors about the company's liquidity position and result in a rise in the share price to $4.2 per share.

Is the planned increase in borrowings expected to help the company meet its gearing objective?

No, gearing would increase but the gearing objective would be met both before and after the announcement.
No, gearing would increase and the gearing objective would be exceeded both before and after the announcement.
No, gearing would increase and the gearing objective would be met before the announcement but exceeded after the announcement.
Yes, gearing would fall and the gearing objective would be exceeded before the announcement but met after the announcement.

Answer(s): B

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QUESTION: 36

A company has a covenant on its 5% long-term bond, stipulating that its retained earnings must not fall below $2 million.

The company has 100 million shares in issue.

Its most recent dividend was $0.045 per share. It has committed to grow the dividend per share by 4% each year.

The nominal value of the bond is $60 million. It is currently trading at 80% of its nominal value.

Next year's earnings before interest and taxation are projected to be $11.25 million.

The rate of corporate tax is 20%.

If the company increases the dividend by 4%, advise the Board of Directors if the level of retained earnings will comply with the covenant?

Covenant is not breached as retained earnings = $2.40 million.
Covenant is not breached as retained earnings = $2.10 million.
Covenant is breached as retained earnings = $1.92 million.
The covenant is not breached as retained earnings = $4.68 million.

Answer(s): C

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