Question 1

A listed company in a high growth industry, where innovation is a key driver of success has always operated a

residual dividend policy, resulting in volatility in dividends due to periodic significant investments in research

and development.

The company has recently come under pressure from some investors to change its dividend policy so that

shareholders receive a consistent growing dividend. In addition, they suggested that the company should use

more debt finance.

If the suggested change is made to the financial policies, which THREE of the following statements are true?

Options :

A : It may give a signal to the market that the company is entering a period of stable growth.

B : There may be a change to the shareholder profile due to 'the clientele effect'.

C : The directors will not have to take shareholder dividend preferences into consideration in future.

D : Retained earnings have a lower cost than debt finance.

E : The company-s financial risk will increase due to its increased use of debt finance.

Answer: A,B

Question 2

A company has accumulated a significant amount of excess cash which is not required for investment for the

foreseeable future.

It is currently on deposit, earning negligible returns.

The Board of Directors is considering returning this excess cash to shareholders using a share repurchase

programme.

The majority of shareholders are individuals with small shareholdings.

Which THREE of the following are advantages of the company undertaking a share repurchase programme?

Options :

A : Individual shareholders can realise their investment if they wish.

B : The earnings per share should increase for the shareholders who do not sell their shares.

C : It reduces excess cash which might have been attractive to predators.

D : It reduces the amount of cash for potential future investment opportunities.

E : Institutional investors generally prefer a constant predictable income in the form of dividends.

Answer: A,B,C

Question 3

Company A needs to raise AS500 mi lion to invest in a new project and is considering using a pub ic issue of

bonds to finance the investment.

Which THREE of the following statements-relating to this bond issue are true?

Options :

A : A company must be listed before it can issue bones.

B : The largest issuer of bond i3 the government.

C : Purchasing bonds in the capital markets enables entities to borrow large amounts of finance.

D : The bond market is unregulated making it easier to raise finance

E : Bonds issues in the corporate debt market are underwritten.

Answer: A,B,C

Question 4

A company financed by equity and debt can be valued by discounting:

Options :

A : free cash flow before interest at WACC.

B : free cash flow before interest at the cost of equity.

C : free cash flow after interest at WACC.

D : free cash flow after interest at the cost of equity.

Answer: A

Question 5

The Treasurer of Z intends to use interest rate options to set an interest rate cap on Z’s borrowings. Which of the following statement is correct?

Options :

A : The Treasurer should buy an interested rate floor and sell an interested cap ta the same time

B : The Treasurer will retain the benefit of movcTcnt3 in interest ratc3 below the floor limit.

C : The cost of a collar is lower than the cost of a cap a one.

D : The Treasurer will have to negotiate the options with Z-s Dark

Answer: C

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