QUESTION: 69

Company A is proposing a rights issue to finance a new investment. Its current debt to equity ratio is 10%.

Which TWO of the following statements are true?

The issue price has to be at least 20% below the pre-rights share price.
The issue price of new shares should be set to guarantee the full take up of shares offered.
The actual ex-rights price may be higher than the theoretical ex-rights price due to the value created from the project.
Company A's current low gearing ratio may require a rights issue rather than a debt issue to finance the new project.
According to Modigliani and Miller's Theory of Capital Structure with tax, the rights issue will result in a lower cost of equity for Company A.

Answer(s): C,E

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QUESTION: 70

Which of the following explains an aim of integrated reporting in accordance with The International <IR> Framework as issued by the International Integrated Reporting Council?

To highlight the need for greater reporting of performance to stakeholders in a greater level of detail than at present.
To support decision making and actions that focus on creating value over the short, medium and long term.
To integrate the various accepted accounting practices of member bodies into a single, unified code of accounting principles.
To highlight the separation of strategy, governance and financial performance in a social, environmental and economic context.

Answer(s): B

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A company has some 7% coupon bonds in issue and wishes to change its interest rate profile.

It has decided to do this by entering into a plain coupon interest rate swap with it's bank.

The bank has quoted a swap rate of: 6.0% - 6.5% fixed against LIBOR.

What will the company's new interest rate profile be?

VARIABLE at LIBOR
VARIABLE at LIBOR + 0.5%
VARIABLE at LIBOR + 1.0%
FIXED at 6.5%

Answer(s): C

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QUESTION: 72

A company plans a four-year project which will be financed by either an operating lease or a bank loan.

Lease details:

· Four year lease contract.

· Annual lease rentals of $45,000, paid in advance on the 1st day of the year.

Other information:

· The interest rate payable on the bank borrowing is 10%.

· The capital cost of the project is $200,000 which would have to be paid at the beginning of the first year.

· A salvage or residual value of $100,000 is estimated at the end of the project's life.

· Purchased assets attract straight line tax depreciation allowances.

· Corporate income tax is 20% and is payable at the end of the year following the year to which it relates.

A lease-or-buy appraisal is shown below:

Which THREE of the following items are errors within the appraisal?

Lease payments are timed incorrectly
Tax relief on lease payments have not been lagged correctly
Using the 10% discount rate is incorrect
The project's operating cashflows should be included
The bank loan repayments should be included
The salvage value has been included within the lease option

Answer(s): B,C,F

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