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NEW QUESTION # 182
X exports goods to customers in a number of small countries Asi
a. 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?
- A. X may be able to sell the receipts forward.
- B. X will know advance the amount of home currency it will receive for the export sales.
- C. The customer will tear the foreign exchange risk and will only buy from X if they are prepared to accept this.
- D. If the proposal is adopted, X will have a lower effective sales price per unit due to exchange rate fluctuations.
- E. 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.
Answer: D,E
NEW QUESTION # 183
Under traditional theory, an increase in a company's WACC would cause the value of the company to:
- A. Either increase or decrease
- B. Stay the same
- C. Decrease
- D. Increase
Answer: C
NEW QUESTION # 184
A company has forecast the following results for the next financial year:
The following is also relevant:
* Profit after tax for the year can be assumed to be equivalent to free cash flow for the year.
* Debt finance comprises a $10 million floating rate loan which currently carries an interest rate of 5%.
* $400,000 investment in non-current assets is required to achieve required growth, all of which is to financed from next year's free cash flow.
* The company plans to pay a dividend of $150,000 next year, financed from next year's free cash flow.
The company is concerned that interest rates could rise next year to 6% which could then affect their investment plans.
If interest rates were to rise to 6% and the company wishes to maintain its dividend amount, the planned investment expenditure will decrease by:
- A. $25,000
- B. $100,000
- C. $75,000
- D. $50,000
Answer: A
NEW QUESTION # 185
Company ACC. an ungeared car manufacturer has launched a takeover bid of Company BDD. a key competitor operating in the same industry Company BDD has high gearing Company ACC has a large surplus cash balance and believes that the acquisition is an opportunity to enhance shareholder wealth through the realisation of synergistic benefits. Which THREE of the following would most likely be synergistic benefits to Company ACC of purchasing Company BDD9 I
- A. Reduction in financial risk due to diversification
- B. Decreased cost of debt
- C. Reduction in staff costs due to the removal of duplicated roles.
- D. Enhanced profit due to reduced competition
- E. Cost savings in production due to economies of scale
Answer: B,C,E
NEW QUESTION # 186
Which of the following statements about IFRS 7 Financial Instruments: Disclosures is true?
- A. IFRS 7 only applies to entities that are designated as financial institutions by a regulatory authority.
- B. IFRS 7 requires sensitivity analysis in relation to credit risk.
- C. The main requirement of IFRS 7 is for qualitative disclosures relating to financial instruments and market risks.
- D. IFRS 7 requires disclosures to be given for each separate class of financial instruments.
Answer: D
NEW QUESTION # 187
AA is considering changing its capital structure. The following information is currently relevant to AA:
The gearing rating raising the new debt finance will be 50%.
Which THREE of the following statement about the impact of AA's change in capital structure are true under Modigliani and Miler's capital structure theory with tax.
- A. The cost of equity will decrease below 10%
- B. The WACC will decrease below 7.6%
- C. The cost of debt will increase above 4%
- D. The cost of debt remain unchanged at 4%
- E. The WACC increase above 7.6
- F. The cost of equity will increase above 10%
Answer: B,E
NEW QUESTION # 188
A company based in Country A with the A$ as its functional currency requires A$500 million 20-year debt finance to finance a long-term investment The company has a high credit rating, but has not previously issued corporate bonds which are listed on the stock exchange Which THREE of the following are advantages of issuing 20 year bonds compared with simply borrowing for a 20 year period?
- A. Greater availability of debt of 20-year duration
- B. Less administrative effort to arrange the new finance
- C. Lower arrangement costs
- D. Larger capital market
- E. Lower interest rate
Answer: A,D,E
NEW QUESTION # 189
A company has:
* A price/earnings (P/E) ratio of 10.
* Earnings of $10 million.
* A market equity value of $100 million.
The directors forecast that the company's P/E ratio will fall to 8 and earnings fall to $9 million.
Which of the following calculations gives the best estimate of new company equity value in $ million following such a change?
- A.
- B.
- C.
- D.
Answer: A
NEW QUESTION # 190
A UK based company is considering investing GBP1 ,000,000 in a project it the USA. It is anticipated that the project will yield net cash inflows of USD580.000 each year for the next three years. These surplus cash flows will be remitted to the UK at the end of each year.
Currently GBP1.00 is worth USD1.30.
The expected inflation rates in the two countries over the next four years are 2% in the UK and 4% in the USA.
Applying the purchasing power parity theory, which of the following represents the expected remittance at the end of year three, in GBP whole the nearest whole GBP)?
- A. GBP450,906
- B. GBP472,916
- C. GBP568,846
- D. GBP546,547
Answer: A
NEW QUESTION # 191
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?
- A. Interest cover would reduce to 5 times and the covenant would NOT be breached.
- B. Interest cover would reduce to 3 times and the covenant would NOT be breached.
- C. Interest cover would reduce to 3 times and the covenant would be breached.
- D. Interest cover would reduce to 5 times and the covenant would be breached.
Answer: A
NEW QUESTION # 192
On 31 October 20X3:
* A company expected to agree a foreign currency transaction in January 20X4 for settlement on 31 March
20X4.
* The company hedged the currency risk using a forward contract at nil cost for settlement on 31 March
20X4.
* The transaction was correctly treated as a cash flow hedge in accordance with IAS 39 Financial Instruments: Recognition and Measurement.
On 31 December 20X3, the financial year end, the fair value of the forward contract was $10,000 (asset).
How should the increase in the fair value of the forward contract be treated within the financial statements for the year ended 31 December 20X3?
- A. Not recognised in 20X3 as the forward contract is not settled until after the year end.
- B. Not recognised in 20X3 as the gain will be offset by a loss on the hedged transaction.
- C. A $10,000 profit will be recognised within other comprehensive income.
- D. A $10,000 profit will be recognised within the Income Statement.
Answer: C
NEW QUESTION # 193
Company ABC's management has noticed that Company BCD has quickly built up a 20% stake by buying shares in Company ABC and are concerned that this is the start of a hostile bid.
This build-up of shares triggers the poison pill provision which automatically converts the rights to buy future preference shares previously issued to existing shareholders in Company ABC to full ordinary shares
What is the most likely impact of the triggering of a poison pill strategy at this stage in the bidding process?
- A. The threat of a hostile takeover is reduced because Company ABC becomes more expensive to buy.
- B. It is too late for a poison pill strategy to have any impact on a hostile takeover because Company BCD has already built up a significant stake in Company ABC.
- C. Company ABC becomes less attractive due to a fall in value of the shares as a result of the discount.
- D. Company BCD loses value on its shareholding and has to sell at a loss before losing more value
Answer: A
NEW QUESTION # 194
Company Z wishes to borrow $50 million for 10 years at a fixed rate of interest.
Two alternative approaches are being considered:
A: Issue a 10 year bond at a fixed rate of 6%, or B: Borrow from the bank at Libor +2.5% for a 10 year period and simultaneously enter into a 10 year interest rate swap.
Current 10 year swap rates against Libor are 4.0% - 4.2%.
What is the difference in the net interest cost between the two alternative approaches?
- A. Approach B is 2.0% a year less expensive
- B. Approach B is 2.2% a year less expensive
- C. Approach A is 0.7% a year less expensive
- D. Approach A is 0.5% a year less expensive
Answer: C
NEW QUESTION # 195
Extracts from a company's profit forecast for the next financial year as follows:
Since preparing the forecast, the company has decided to return surplus cash to shareholders by a share repurchase arrangement.
The share repurchase would result in the company purchasing 20% of the 1,250 million ordinary shares currently in issue and canceling them.
Assuming the share repurchase went ahead, the impact on the company's forecast earnings per share will be an increase of:
- A. $0.125
- B. $0.200
- C. $0.100
- D. $0.175
Answer: C
NEW QUESTION # 196
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. Private placement of a bond
- B. Rights issue
- C. Retained earnings
- D. Bank overdraft
Answer: B
NEW QUESTION # 197
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