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F3 Financial Strategy Questions 161–168 (page: 22)

A company is planning a share repurchase programme with the following details:   
* Repurchased shares will be immediately cancelled.   
* The shares will be purchased at a premium to the market share price. The current market share price is greater than the nominal value of the shares.
Which of the following statements about the impact of the share repurchase programme on the company's financial statements is correct? 

A company has 8% convertible bonds in issue. The bonds are convertible in 3 years time at a ratio of 20 ordinary shares per $100 nominal value bond.
Each share:   
* has a current market value of $5.60   
* is expected to grow at 5% each year
What is the expected conversion value of each $100 nominal value bond in 3 years' time? 

A company has:   
* $6 million market value of equity   
* $4 million market value of debt    
* WACC of 11.04%   
* Corporate income tax rate of 20%
According to Modigliani and Miller's theory of capital structure with tax, what is the ungeared cost of equity?

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? 

A company's gearing (measured as debt/(debt + equity)) is currently 60% and it is investigating whether an optimal gearing structure exists within the industry. It has analysed the capital structure of similar companies in the industry and it would appear that there is evidence supporting the traditional theory of capital structure. Companies with the lowest WACC in the industry have gearing of around 45% to 50%.
Which of the following actions would result in the company achieving a more optimal capital structure?

A large, quoted company that is all-equity financed is planning to acquire a smaller unquoted company that is also all-equity financed. The acquiring company's directors are using the dividend valuation model to value the target company before making an offer.
Relevant data for the target company:   
* Dividends paid in the last financial year           $2 million   
* Book value of net assets                                     $15 million   
* Shares in issue                                                     1 million The acquiring company's cost of capital is 10%. Its directors believe they can improve the target company's performance in the long term. They estimate there will be no growth in the first year of the acquisition but from year 2 onwards there will be a 4% growth each year in perpetuity.
What is the maximum price the acquiring company should offer for each of the shares in the target company? 

A listed company in a high technology industry has decided to value its intellectual capital using the Calculated Intangible Value method (CIV).
Relevant data for the company:   
* Pays corporate income tax at 30%   
* Cost of equity is 9%, pre-tax cost of debt is 7% and the WACC is 8%   
* The value spread has been calculated as $26 million
Calculate the CIV for the company.

Company A has made an offer to acquire Company Z.   Both companies are quoted and their current market share prices are:   
* Company A - $4   
* Company Z - $5 Shareholders in company Z have been given three alternative offers:   
* Cash of $5.50 per share   
* Share for share exchange on the basis of 3 for 2   
* 10.5% long dated bond for every 20 shares The bond is has a nominal value of $100 and the expected yield on bonds of similar risk is 10%.
You are advising a Company Z shareholder on the three offers. She requires a 15% premium if she is to accept the offer. 
In providing your advice, which of the following statements is correct?