Question 1

Company A is located in Country A, where the currency is the A$.

It is listed on the local stock market which was set up 10 years ago.

It plans a takeover of Company B, which is located in Country B where the currency is the B$, and where the

stock market has been operating for over 100 years.

Company A is considering how to finance the acquisition, and how the shareholders of Company B might

respond to a share exchange or cash (paid in B$).

Which of the following is likely to explain why the shareholders of Company B would prefer a share exchange

as opposed to a cash offer?

Options :

A : It would allow them to realise their investment and make a capital gain.

B : It would avoid them being exposed to foreign currency risk.

C : They would receive shares in a market that is likely to be more efficient.

D : It would enable them to benefit from the future performance of the combined entity.

Answer: D

Question 2

Company U has made a bid for the entire share capital of Company B.

Company U is offering the shareholders in Company B the option of either a share exchange or a cash

alternative.

Advise the shareholders in Company B which THREE of the following would be considered disadvantages of

accepting the cash consideration?

Options :

A : Cash consideration is certain whereas Company U-s future share price performance is uncertain.

B : Interest rates on deposit accounts are currently at a historic low and are expected to remain low.

C : Company U is not expected to change its dividend policy post-acquisition.

D : Taxation is payable on realised capital gains.

E : There will be no opportunity to participate in the future economic success of Company U.

Answer: A,B,D

Question 3

A company has just received a hostile bid. Which of the following response strategies could be considered?

Options :

A : Revalue non-current assets

B : Poison pill strategy

C : Change the Articles of Association to amend voting rights

D : Approach a White Knight

Answer: D

Question 4

The Board of Directors of Company T is considering a rights issue to fund a new investment opportunity

which has a zero NPV.

The Board of Directors wishes to explain to shareholders what the theoretical impact on their wealth will be as

a result of different possible actions during the rights issue.

Which THREE of the following statements in respect of theoretical shareholder wealth are true?

Options :

A : If shareholders exercise their full rights there will be no impact on their wealth.

B : If the shareholders allow their rights to lapse (do nothing) there will be no impact on their wealth.

C : If shareholders sell their entire rights entitlement there will be no impact on their wealth.

D : If the shareholders only partially exercise their rights and allow the remainder to lapse there will be no impact on their wealth

E : If shareholders partially exercise their rights and sell the remaining rights entitlement there will be no impact on their wealth.

Answer: A,C

Question 5

TU 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?

Options :

A : TU does not account for its tangible assets

B : TU does not account for its intangible assets.

C : TU accounts for its intangible assets at net realisable value.

D : TU accounts for its intangible assets at historical value.

Answer: B

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