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Free F3 Exam Braindumps (page: 12)

Page 11 of 56
PDF with 391 Questions

The Board of Directors of a listed company have decided that it needs to increase its equity capital to ensure it is in a more stable financial position.

The shareholder profile is a mix of institutional and individual small shareholders.

The board is considering either:

· A scrip dividend

· A zero dividend

Which THREE of the following would be considered disadvantages of a scrip dividend compared to a zero dividend?

  1. A scrip dividend results in distributable reserves being moved to non-distributable reserves.
  2. A scrip dividend will dilute the control of current shareholders.
  3. A scrip dividend results in more shares in issue which will create an expectation for future dividends.
  4. There will be company secretarial and additional administration involved with a scrip dividend.
  5. A scrip issue may give shareholders the impression that they are receiving something of value.

Answer(s): A,C,D



A company's current earnings before interest and taxation are $5 million.

These are expected to remain constant for the forseeable future.

The company has 10 million shares in issue which currently trade at $3.60.

It also has a $10 million long term floating rate loan.

The current interest rate on this loan is 5%.

The company pays tax at 20%.

The company expects interest rates to increase next year to 6% and it's Price/Earnings (P/E) ratio to move to 9.5 times by the end of next year.

What percentage reduction in the share price will occur by the end of next year if the interest rate increase and the P/E movement both occur?

  1. Reduction of 7%
  2. Reduction of 5%
  3. Reduction of 1%
  4. Reduction of 0%

Answer(s): A



A company financed by equity and debt can be valued by discounting:

  1. free cash flow before interest at WACC.
  2. free cash flow before interest at the cost of equity.
  3. free cash flow after interest at WAC
  4. free cash flow after interest at the cost of equity.

Answer(s): A



A company is deciding whether to offer a scrip dividend or a cash dividend to its shareholders.

Although the company has excellent long-term growth prospects, it is experiencing short- term profit and cash flow problems.

Which of the following statements is most likely to be a reason for choosing the scrip dividend?

  1. It is a way of raising additional finance to promote future growth.
  2. It is a way of increasing earnings per share.
  3. It is a way of encouraging shareholders to allow cash to be retained in the business.
  4. It is a way of increasing dividend per share.

Answer(s): C






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