A company's Board of Directors is assessing the likely impact of financing new projects by using either debt or equity finance.
The impact of using debt or equity finance on some key variables is uncertain.
Which THREE of the following statements are true?
A company is currently all-equity financed with a cost of equity of 8%.
It plans to raise debt with a pre-tax cost of 4% in order to buy back equity shares.
After the buy-back, the debt-to-equity ratio at market values will be 1 to 2.
The corporate income tax rate is 30%.
Which of the following represents the company's cost of equity after the buy-back according to Modigliani and Miller's Theory of Capital Structure with taxes?
The International Integrated Reporting Council (IIRC) was formed in August 2010 and brings together a cross-section of representatives from a wide variety of business sectors.
The primary purpose of the IIRC's framework is to help enable an organsation to communicate how it:
A listed company is financed by debt and equity.
If it increases the proportion of debt in its capital structure it would be in danger of breaching a debt covenant imposed by one of its lenders.
The following data is relevant:
The company now requires $800 million additional funding for a major expansion programme.
Which of the following is the most appropriate as a source of finance for this expansion programme?
A company intends to sell one of its business units. Company W, by a management buyout (MBO). A selling price of S200 million has been agreed.
The managers are discussing with a bank and a venture capital company (VCC) the following financing proposal.
The VCC requires a minimum return on its equity investment In the MBO of 35% a year on a compound basis over 5 years. What is the minimum total equity value of Company W in 5 years time in order to meet the VCC's required return? Give your answer to one decimal place.
Company WWW is considering making a takeover bid for Company KKA Company KKA's current share price is $5.00
Company WWW is considering either
" A cash payment of $5.75 for each share in Company KKA
" A 5 year corporate bond with a market value of $90 in exchange for 15 shares in Company KKA
Calculate the highest percentage premium which Company KKA shareholders will receive.
M is an accountant who wishes to take out a forward rate agreement as a hedging instrument but the company treasurer has advised that a short-term interest rate future would be a better option.
Which of the following is true of a short-term interest ratefuture?
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?
STU has relatively few tangible assets and is dependent for profits and growth on the high-value individuals it employs. Which of the following statements best explains why the net asset valuator method’s considered unstable for TU?
A large, listed company is planning a major project that should greatly improve its share price in the long term.
These plans require a significant capital cost that the company plans to finance by debt.
All of the debt options being considered are for the same duration of time.
Which of the following sources of debt finance is likely to be the most expensive for the company over the full term of the debt?
TESTED 22 Feb 2025
