Pearson F3 New Attempt

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Question 8

Company A is based in Country A where the functional currency is the A$. Currently all sales are to domestic customers in Country A. However, the company is planning to expand internationally by acquiring Company B, a distribution company in Country B, to enable it to sell goods worldwide The functional currency of Country B is the BS

Company A will invoice its international customers in their local currency.

Wage increases in Country B are forecast to be modest, due to high unemployment levels, but overall inflation in Country B is forecast to be significantly higher than in Country A

Which TWO of the following statements about the economic risk of the acquisition of Company B are true?

Options:

Financing this acquisition with block denominated in B$ will reduce economic risk.

Economic risk can be eliminated by using forward contracts to convert future cash flows into A$

Higher inflation will increase the project's BS returns, so the economic risk can be ignored

Exporting into a variety of international markets will reduce economic risk.

Using purchasing power parity, AS is forecast to strengthen against B$, so the economic risk can be ignored

Question 9

Company A has agreed to buy all the share capital of Company B.

The Board of Directors of Company A believes that the post-acquisition value of the expanded business can be computed using the "boot-strapping" concept.

Which of the following most accurately describes "boot-strapping" in this context?

Options:

Forecasting the future free cash flows of the combined entities and discounting these at the bidder's Weighted Average Cost of Capital

Adding together the current post tax earnings of each company and multiplying this by the price earnings ratio of the acquired entity

Adding together the current post-tax earnings of each company and multiplying this by the price/earnings ratio of the bidder

Combining the pre-acquisition market capitalisation of each company

Question 10

X exports goods to customers in a number of small countries Asia. At present, X invoices customers in X's home currency.

The Sales Director has proposed that X should begin to invoice in the customers currency, and the Treasurers considering the implications of the proposal.

Which TWO of the following statement are correct?

Options:

X may be able to sell the receipts forward.

If the proposal is adopted, X will have a lower effective sales price per unit due to exchange rate fluctuations.

X will know advance the amount of home currency it will receive for the export sales.

The overseas customers may have difficulty obtaining X's name currency with which to make the purchases, so the Sales Director’s proposal may increase sales.

The customer will tear the foreign exchange risk and will only buy from X if they are prepared to accept this.

Question 11

At the last financial year end, 31 December 20X1, a company reported:

The corporate income tax rate is 30% and the bank borrowings are subject to an interest cover covenant of 4 times.

The results are presently comfortably within the interest cover covenant as they show interest cover of 8.3 times. The company plans to invest in a new product line which is not expected to affect profit in the first year but will require additional borrowings of $20 million at an annual interest rate of 10%.

What is the likely impact on the existing interest cover covenant?