Question # 1
An all-equity financed company currently generates total revenue of $50 million.
Its current profit before interest and taxation (PBIT) is $10 million.
Due to difficult trading conditions, the company expects its total revenue to be constant
next year, although some margins will reduce.
It forecasts next year's PBIT will fall to 18% on 40% of its revenue, but that the PBIT on
the other 60% of its revenue will be unaffected.
The rate of corporate tax is 20%.
What is the forecast percentage reduction in next year's Earnings? | | A. Reduction of 0.8% | | B. Reduction of 2.0% | | C. Reduction of 4.0% | | D. Reduction of 0% |
Question # 2
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. | | A. It does not account for the intangible assets | | B. It accounts for the intangible assets at historical value.
| | C. It accounts for intangible assets at net realisable value. | | D. It does not account for tangible assets |
A. It does not account for the intangible assets
Question # 3
The primary objective of a public sector entity is to ensure value for money is generated.
Value for money is defined as performing an activity so as to simultaneously achieve
economy, efficiency and effectiveness
Efficiency is defined as: | | A. spending funds so as to achieve the objectives of the entity. | | B. performing activities in the least amount of time possible | | C. obtaining maximum output from minimum inputs | | D. obtaining quality inputs at minimum cost |
B. performing activities in the least amount of time possible
Question # 4
Company Y plans to diversify into an activity where Company X has an equity beta of 1.6, a
debt beta of zero and gearing of 50% (debt/debt plus equity).
The risk-free rate of return is 5% and the market portfolio is expected to return 10%.
The rate of corporate income tax is 30%.
What would be the risk-adjusted cost of equity if Company Y has 60% equity and 40%
debt? | | A. 11.6% | | B. 11.9% | | C. 9.1% | | D. 13% |
Question # 5
Listed company R is in the process of making a cash offer for the equity of unlisted
company S.
Company R has a market capitalisation of $200 million and a price/earnings ratio of 10.
Company S has a market capitalisation of $50 million and earnings of $7 million.
Company R intends to offer $60 million and expects to be able to realise synergistic
benefits of $20 million by combining the two businesses. This estimate excludes the
estimated $8 million cost of integrating the two businesses.
Which of the following figures need to be used when calculating the value of the combined
entity in $ millions? | | A. 8, 20, 50, 60, 200 | | B. 8, 20, 50, 200
| | C. 20, 50, 60, 200 | | D. 7, 10, 20, 50, 200 |
Question # 6
Company A is a large listed company, with a wide range of both institutional and private
shareholders.
It is planning a takeover offer for Company B.
Company A has relatively low cash reserves and its gearing ratio of 40% is higher than
most similar companies in its industry.
Which TWO of the following would be the most feasible ways of Company A structuring an
offer for Company B? | | A. Cash offer, funded by borrowings. | | B. Share for share exchange. | | C. Cash offer, funded from existing cash resources. | | D. Cash offer, funded by a rights issue. | | E. Debt for share exchange. |
B. Share for share exchange. D. Cash offer, funded by a rights issue.
Question # 7
The directors of the following four entities have been discussing dividend policy:
Which of these four entities is most likely to have a residual dividend policy? | | A. A | | B. B | | C. C | | D. D |
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