QUESTION: 105

A company's Board of Directors is assessing the likely impact of financing new projects by using either debt or equity finance.

The impact of using debt or equity finance on some key variables is uncertain.

Which THREE of the following statements are true?

The use of equity finance reduces the company's overall financial risk.
The use of equity finance will create pressure for increases in dividend per share in the future.
The use of debt finance will always result in an increase in earnings per share.
Retained earnings is the cheapest form of equity finance.
The use of debt finance increases the cost of equity.
The use of debt finance is always preferable to equity finance.

Answer(s): A,B,E

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QUESTION: 106

Which THREE of the following non-financial objectives would be most appropriate for a listed company in the food retailing industry?

Reduce customer complaints
Increase customer service quality
Reduce production time
Improve staff morale
Reduce raw material wastage

Answer(s): A,B,D

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QUESTION: 107

A company's current earnings before interest and taxation are $5 million.

These are expected to remain constant for the forseeable future.

The company has 10 million shares in issue which currently trade at $3.60.

It also has a $10 million long term floating rate loan.

The current interest rate on this loan is 5%.

The company pays tax at 20%.

The company expects interest rates to increase next year to 6% and it's Price/Earnings (P/E) ratio to move to 9.5 times by the end of next year.

What percentage reduction in the share price will occur by the end of next year if the interest rate increase and the P/E movement both occur?

Reduction of 7%
Reduction of 5%
Reduction of 1%
Reduction of 0%

Answer(s): A

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QUESTION: 108

CORRECT TEXT

A venture capitalist invests in a company by means of buying:

· 9 million shares for $2 a share and

· 8% bonds with a nominal value of $2 million, repayable at par in 3 years' time.

The venture capitalist expects a return on the equity portion of the investment of at least 20% a year on a compound basis over the first 3 years of the investment.

The company has 10 million shares in issue.

What is the minimum total equity value for the company in 3 years' time required to satisify the venture capitalist's expected return?

Give your answer to the nearest $ million.

$34 million, $35 million, $34000000, $35000000

Answer(s): A

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