QUESTION: 109

A company is currently all-equity financed.

The directors are planning to raise long term debt to finance a new project.

The debt:equity ratio after the bond issue would be 30:60 based on estimated market values.

According to Modigliani and Miller's Theory of Capital Structure without tax, the company's cost of equity would:

stay the same.
decrease.
increase.
increase or decrease depending on the bond's coupon rate.

Answer(s): C

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QUESTION: 110

A listed company has recently announced a profit warning.

The company's share price fell 20% on the day of the announcement but had been fairly static in the weeks leading up to the announcement.

Which form of efficient market is most likely to be indicated by this share price movement?

Weak form
Semi-strong form
Strong form
Random walk

Answer(s): B

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QUESTION: 111

A manufacturing company is based in Country L whose currency is the L$.

One of the company's products is exported to Country M, a rapidly growing economy,

whose currency is the M$.

In the most recent financial year:

· 100,000 units of the product were sold to customers in country M

· The unit selling price was M$12

The spot rate today is L$1 = M$5

The company has an objective of growth in total sales value in L$ of 10% a year.

If the L$ strengthens by 5% next year against the M$, what volume of sales of this product is needed next year to achieve the objective?

115,500 units
104,500 units
105,000 units
110,000 units

Answer(s): A

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QUESTION: 112

Company U has made a bid for the entire share capital of Company B.

Company U is offering the shareholders in Company B the option of either a share exchange or a cash alternative.

Advise the shareholders in Company B which THREE of the following would be considered disadvantages of accepting the cash consideration?

Cash consideration is certain whereas Company U's future share price performance is uncertain.
Interest rates on deposit accounts are currently at a historic low and are expected to remain low.
Company U is not expected to change its dividend policy post-acquisition.
Taxation is payable on realised capital gains.
There will be no opportunity to participate in the future economic success of Company U.

Answer(s): B,D,E

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QUESTION: 109

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QUESTION: 112

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