QUESTION: 45

Listed company R is in the process of making a cash offer for the equity of unlisted company S.

Company R has a market capitalisation of $200 million and a price/earnings ratio of 10.

Company S has a market capitalisation of $50 million and earnings of $7 million.

Company R intends to offer $60 million and expects to be able to realise synergistic benefits of $20 million by combining the two businesses. This estimate excludes the estimated $8 million cost of integrating the two businesses.

Which of the following figures need to be used when calculating the value of the combined entity in $ millions?

8, 20, 50, 60, 200
8, 20, 50, 200
20, 50, 60, 200
7, 10, 20, 50, 200

Answer(s): A

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QUESTION: 46

CORRECT TEXT

A company wishes to raise new finance using a rights issue. The following data applies:

· There are 10 million shares in issue with a market value of $4 each

· The terms of the rights will be 1 new share for 4 existing shares held

· After the rights issue, the theoretical ex-rights price (TERP) will be $3.80

Assuming all shareholders take up their rights, how much new finance will be raised ?

Give your answer to one decimal place.

$7.5, $7.50 million

Answer(s): A

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QUESTION: 47

On 31 October 20X3:

· A company expected to agree a foreign currency transaction in January 20X4 for settlement on 31 March 20X4.

· The company hedged the currency risk using a forward contract at nil cost for settlement on 31 March 20X4.

· The transaction was correctly treated as a cash flow hedge in accordance with IAS 39 Financial Instruments: Recognition and Measurement.

On 31 December 20X3, the financial year end, the fair value of the forward contract was $10,000 (asset).

How should the increase in the fair value of the forward contract be treated within the financial statements for the year ended 31 December 20X3?

Not recognised in 20X3 as the forward contract is not settled until after the year end.
Not recognised in 20X3 as the gain will be offset by a loss on the hedged transaction.
A $10,000 profit will be recognised within the Income Statement.
A $10,000 profit will be recognised within other comprehensive income.

Answer(s): D

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