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F3 Financial Strategy Questions 185–192 (page: 25)

A profit-seeking company intends to acquire another company for a variety of reasons, primarily to enhance shareholder wealth.
Which THREE of the following offer the greatest potential for enhancing shareholder wealth?

A company's Board of Directors is considering raising a long-term bank loan incorporating a number of covenants. The Board members are unsure what loan covenants involve. 
Which THREE of the following statements regarding loan covenants are true?

Company A is identical in all operating and risk characteristics to Company B, but their capital structures differ. Company B is all-equity financed. Its cost of equity is 17%. Company A has a gearing ratio (debt:equity) of 1:2. Its pre-tax cost of debt is 7%.  Company A and Company B both pay corporate income tax at 30%.
What is the cost of equity for Company A?

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.
$  ?   million

A company wishes to raise new finance using a rights issue to invest in a new project offering an IRR of 10%
The following data applies:   
* There are currently 1 million shares in issue at a current market value of $4 each.   
* The terms of the rights issue will be $3.50 for 1 new share for 5 existing shares.   
* The company's WACC is currently 8%.
 What is the yield-adjusted theoretical ex-rights price (TERP)?
Give your answer to 2 decimal places.
$  ?  

A company plans to cut its dividend but is concerned that the share price will fall.  This demonstrates the _____________  effect

A company enters into a floating rate borrowing with interest due every 12 months over the five year life of the borrowing.  At the same time, the company arranges an interest rate swap to swap the interest profile on the borrowing from floating to fixed rate.  These transactions are designated as a hedge for hedge accounting purposes under IAS 39 Financial Instruments: Recognition and Measurement.
Assuming the hedge is considered to be effective, how would the swap be accounted for 12 months later? 

A company's latest accounts show profit after tax of $20.0 million, after deducting interest of $5.0
million. The company expects earnings to grow at 5% per annum indefinitely. 
The company has estimated its cost of equity at 12%, which is included in the company WACC of 10%.
Assuming that profit after tax is equivalent to cash flows, what is the value of the equity capital?
Give your answer to the nearest $ million.
$  ?   million