QUESTION: 21

Company Z has identified four potential acquisition targets: companies A, B, C and D.

Company Z has a current equity market value of $580 million.

The price it would have to pay for the equity of each company is as follows:

Only one of the target companies can be acquired and the consideration will be paid in cash.

The following estimations of the new combined value of Company Z have been prepared for each acquisition before deduction of the cash consideration:

Ignoring any premium paid on acquisition, which acquisition should the directors pursue?

A
B
C
D

Answer(s): C

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QUESTION: 22

Which THREE of the following long term changes are most likely to increase the credit rating of a company?

An increase in the interest cover ratio.
A decrease in the (Net debt) / (Earnings before interest, tax, depreciation and amortisation) ratio.
An increase in the free cashflow generated from operations.
A decrease in the (Book value of debt) / (Book value of equity) ratio.
A decrease in the dividend cover ratio.

Answer(s): A,B,C

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QUESTION: 23

A consultancy company is dependent for profits and growth on the high value individuals it employs.

The company has relatively few tangible assets.

Select the most appropriate reason for the net asset valuation method being considered unsuitable for such a company.

It does not account for the intangible assets.
It accounts for the intangible assets at historical value.
It accounts for intangible assets at net realisable value.
It does not account for tangible assets.

Answer(s): A

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QUESTION: 24

A company's gearing (measured as debt/(debt + equity)) is currently 60% and it is investigating whether an optimal gearing structure exists within the industry.

It has analysed the capital structure of similar companies in the industry and it would appear that there is evidence supporting the traditional theory of capital structure.

Companies with the lowest WACC in the industry have gearing of around 45% to 50%.

Which of the following actions would result in the company achieving a more optimal capital structure?

Undertaking a rights issue of equity to repay some of its debt.
Refinancing to replace some of its short term debt with long term debt.
Increasing the level of dividend to return more cash to shareholders.
Using retained cash to undertake a buyback of some of its equity.

Answer(s): A

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