QUESTION: 13

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?

Achieving more press coverage for the company.
Creating new opportunities for employees.
Achieving greater cultural diversity.
Acquiring Intellectual Property assets.
Exploiting production synergies.
Elimination of existing competition.

Answer(s): D,E,F

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QUESTION: 14

A company is undertaking a lease-or-buy evaluation, using the post-tax cost of bank borrowing as the discount rate.

Details of the two alternatives are as follows:

Buy option:

· To be financed by a bank loan

· Tax depreciation allowances are available on a reducing-balance basis

· Assets depreciated on a straight-line basis

Lease option:

· Finance lease

· Maintenance to be paid by the lessee

· Tax relief available on interest payments and book depreciation

Which THREE of the following are relevant cashflows in the lease-or-buy appraisal?

Tax relief on tax depreciation allowances
Bank loan payments
Maintenance payments
Lease payments
Tax relief on the book depreciation

Answer(s): A,D,E

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QUESTION: 15

A company currently has a 6.25% fixed rate loan but it wishes to change the interest style of the loan to variable by using an interest rate swap directly with the bank.

The bank has quoted the following swap rate:

· 5.50% - 5.55% in exchange for LIBOR

LIBOR is currently 5%.

If the company enters into the swap and LIBOR remains at 5%, what will the company's interest cost be?

5.00%
5.75%
5.70%
6.25%

Answer(s): B

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QUESTION: 16

A company has:

· 10 million $1 ordinary shares in issue

· A current share price of $5.00 a share

· A WACC of 15%

The company holds $10 million in cash. No interest is earned on this cash.

It will invest this in a project with an expected NPV of $4 million.

In a semi-strong efficient stock market, which of the following is the most likely share price immediately after the announcement of the new investment?

$5.40
$6.40
$6.80
$5.30

Answer(s): A

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