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F3 Financial Strategy Questions 33–40 (page: 6)

If a company's bonds are currently yielding 8% in the marketplace, why would the entity's cost of debt be lower than this?

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

A company aims to increase profit before interest and tax (PBIT) each year. The company reports in A$ but has significant export sales priced in B$.  All other transactions are priced in A$.
In 20X1, the company reported:

In 20X2, the only changes expected are:   
* An increase in export prices of 10%, but no change to units sold.   
* A rise in the value of the B$ to A$/B$ 2.500 (that is, A$ 1 = B$ 2.5)
Is it likely that the company would still meet its objective to grow PBIT between 20X1 and 20X2?

Holding cash in excess of business requirements rather than returning the cash to shareholders is most likely to result in lower:

A company has a financial objective of maintaining a gearing ratio of between 30% and 40%, where gearing is defined as debt/equity at market values.  The company has been affected by a recent economic downturn leading to a shortage of liquidity and a fall in the share price during 20X1.
On 31 December 20X1 the company was funded by:
*    Share capital of 4 million $1 shares trading at $4.0 per share.
*    Debt of $7 million floating rate borrowings.
The directors plan to raise $2 million additional borrowings in order to improve liquidity.   They expect this to reassure investors about the company's liquidity position and result in a rise in the share price to $4.2 per share.
Is the planned increase in borrowings expected to help the company meet its gearing objective?

A company is considering the issue of a convertible bond compared to a straight bond issue (non-convertible bond). Director A is concerned that issuing a convertible bond will upset the shareholders for the following reasons:   
* it will dilute their control   
* the interest payments will be higher therefore reducing liquidity   
* it will increase the gearing ratio therefore increasing financial risk Director B disagrees, and is preparing a board paper to promote the issue of the convertible bond rather than a non-convertible.
Advise the Director B which THREE of the following statements should be included in his board paper to promote the issue of the convertible bond?

A private company manufactures goods for export, the goods are priced in foreign currency B$.   The company is partly owned by members of the founding family and partly by a venture capitalist who is helping to grow the business rapidly in preparation for a planned listing in three years' time.   The company therefore has significant long term exposure to the B$.  This exposure is hedged up to 24 months into the future based on highly probable forecast future revenue streams.   The company does not apply hedge accounting and this has led to high volatility in reported earnings. 
Which of the following best explains why external consultants have recently advised the company to apply hedge accounting?

A company generates and distributes electricity and gas to households and businesses. 
Forecast results for the next financial year are as follows:

The Industry Regulator has announced a new price cap of $1.50 per Kilowatt.  The company expects this to cause consumption to rise by 10% but costs would remained unaltered. 
The price cap is expected to cause the company's net profit to fall to: