QUESTION: 49

A company's main objective is to achieve an average growth in dividends of 10% a year.

In the most recent financial year:

Sales are expected to grow at 8% a year over the next 5 years.

Costs are expected to grow at 5% a year over the next 5 years.

What is the minimum dividend payout ratio in 5 years' time that would allow the company to achieve its objective?

21.7%
30.0%
27.5%
22.5%

Answer(s): A

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QUESTION: 50

A company has accumulated a significant amount of excess cash which is not required for investment for the foreseeable future.

It is currently on deposit, earning negligible returns.

The Board of Directors is considering returning this excess cash to shareholders using a share repurchase programme.

The majority of shareholders are individuals with small shareholdings.

Which THREE of the following are advantages of the company undertaking a share repurchase programme?

Individual shareholders can realise their investment if they wish.
The earnings per share should increase for the shareholders who do not sell their shares.
It reduces excess cash which might have been attractive to predators.
It reduces the amount of cash for potential future investment opportunities.
Institutional investors generally prefer a constant predictable income in the form of dividends.

Answer(s): A,B,C

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QUESTION: 51

A company wishes to raise additional debt finance and is assessing the impact this will have on key ratios.

The following data currently applies:

· Profit before interest and tax for the current year is $500,000

· Long term debt of $300,000 at a fixed interest rate of 5%

· 250,000 shares in issue with a share price of $8

The company plans to borrow an additional $200,000 on the first day of the year to invest in new project which will improve annual profit before interest and tax by $24,000.

The additional debt would carry an interest rate of 3%.

Assume the number of shares in issue remain constant but the share price will increase to $8.50 after the investment.

The rate of corporate income tax is 30%.

After the investment, which of the following statements is correct?

Interest cover will fall; P/E ratio will fall.
Interest cover will fall; P/E ratio will rise.
Interest cover will rise; P/E ratio will rise.
Interest cover will rise; P/E ratio will fall.

Answer(s): B

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QUESTION: 52

A company is valuing its equity prior to an initial public offering (IPO).

Relevant data:

· Earnings per share $1.00

· WACC is 8% and the cost of equity is 12%

· Dividend payout ratio 40%

· Dividend growth rate 2% in perpetuity

The current share price using the Dividend Valuation Model is closest to:

$4.08
$6.12
$6.80
$4.00

Answer(s): A

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QUESTION: 49

QUESTION: 50

QUESTION: 51

QUESTION: 52

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