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F3 Financial Strategy Questions 193–200 (page: 26)

Company A plans to acquire Company B, an unlisted company which has been in business for 3 years. It has incurred losses in its first 3 years but is expected to become highly profitable in the near future. No listed companies in the country operate the same business field as Company B, a unique new high-risk business process. The future success of the process and hence the future growth rate in earnings and dividends is difficult to determine. Company A is assessing the validity of using the dividend growth method to value Company B.  Which THREE of the following are weaknesses of using the dividend growth model to value an unlisted company such as Company B?

Company T is a listed company in the retail sector. Its current profit before interest and taxation is $5 million. This level of profit is forecast to be maintainable in future. Company T has a 10% corporate bond in issue with a nominal value of $10 million. This currently trades at 90% of its nominal value. Corporate tax is paid at 20%.
The following information is available:

Which of the following is a reasonable expectation of the equity value in the event of an attempted takeover?

Company M's current profit before interest and taxation is $5.0 million. It has a long-term 10% corporate bond in issue with a nominal value of $10 million. The rate of corporate tax is 25%. It plans to continue to pay out 50% of its earnings in dividends and earnings are expected to grow by 3% each year in perpetuity. Its cost of equity is 10%.
Using the dividend growth model, advise the Board of Directors of Company M which of the following provide a reasonable valuation of Company M's equity?

A company's dividend policy is to pay out 50% of its earnings. Its most recent earnings per share was $0.50, and it has just paid a dividend per share of $0.25. Currently, dividends are forecast to grow at 2% each year in perpetuity and the cost of equity is 10.5%.
In order to grow its earnings and dividends, the company is considering undertaking a new investment funded entirely by debt finance. If the investment is undertaken:   
* Its cost of equity will immediately increase to 12% due to the increased finance risk.   
* Its earnings and dividends will immediately commence growing at 4% each year in perpetuity.
Which of the following is the expected percentage change in the share price if the new investment is undertaken?

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?

A listed company with a growing share price plans to finance a four-year research project with debt.  The main criterion for the finance is to minimise the annual cashflow payments on the debt. The research will be sold at the end of the project.
Which of the following would be the most suitable financing method for the company?

A listed company in the retail sector has accumulated excess cash. In recent years, it has experienced uncertainly with forecasting the required level of cash for capital expenditure due to unpredictable economic cycles. Its excess cash is on deposit earning negligible returns. The Board of Directors is considering the company's dividend policy, and the need to retain cash in the company.
Which THREE of the following are advantages of retaining excess cash in the company? 

A listed company in a high growth industry, where innovation is a key driver of success has always operated a residual dividend policy, resulting in volatility in dividends due to periodic significant investments in research and development.
The company has recently come under pressure from some investors to change its dividend policy so that shareholders receive a consistent growing dividend. In addition, they suggested that the company should use more debt finance. 
If the suggested change is made to the financial policies, which THREE of the following statements are true?