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F3 Financial Strategy Questions 113–120 (page: 16)

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?

Which of the following statements best describes a residual dividend policy?

A company is considering the issue of a convertible bond compared to a straight bond issue (non-convertible bond). Director A is concerned that issuing a convertible bond will upset the shareholders for the following reasons:   
* it will dilute their control   
* the interest payments will be higher therefore reducing liquidity   
* it will increase the gearing ratio therefore increasing financial risk Director B disagrees, and is preparing a board paper to promote the issue of the convertible bond rather than a non-convertible.
Advise the Director B which THREE of the following statements should be included in his board paper to promote the issue of the convertible bond?

A company is reporting under IFRS 7 Financial Instruments: Disclosures for the first time and the directors are concerned about whether this will lead to the disclosure of information that could affect the company's share price. The company is based in a country that uses the A$ but 40% of revenue relates to export sales to the USA and priced in US$. 
When the company reports under IFRS 7 for the first time, the share price is most likely to:

A company has a covenant on its 5% long term corporate bond.   
* Covenant - The earnings must not fall below $7 million The bond has a nominal value of $60 million. It is currently trading at 80% of its nominal value. The projected earnings before interest and taxation for next year are $11.5 million. The company retains 80% of its earnings. It pays tax at 20%.
Advise the Board of Directors which of the following covenant conditions will apply next year?

The competition authorities are investigating the takeover of Company Z by a larger company,
Company Y. Both companies are food retailers.  The takeover terms involve using a part cash, part share exchange means of payment. Company Z is resisting the bid, arguing that it undervalues its business, while lobbying extensively among politicians to sway public opinion against the bidder.
Which of the following actions by Company Y is most likely to persuade the competition authorities to approve the acquisition?

Company A plans to acquire Company B. Both firms operate as wholesalers in the fashion industry, supplying a wide range of ladies' clothing shops. Company A sources mainly from the UK, Company B imports most of its supplies from low-income overseas countries. Significant synergies are expected in management costs and warehousing, and in economies of bulk purchasing.
Which of the following is likely to be the single most important issue facing Company A in post-merger integration?

Company A is located in Country A, where the currency is the A$. It is listed on the local stock market which was set up 10 years ago. It plans a takeover of Company B, which is located in Country B where the currency is the B$, and where the stock market has been operating for over 100 years. Company A is considering how to finance the acquisition, and how the shareholders of Company B might respond to a share exchange or cash (paid in B$).
Which of the following is likely to explain why the shareholders of Company B would prefer a share exchange as opposed to a cash offer?