Question 1

Company C is a listed company. It is currently considering the acquisition of Company D. The original

founder of Company C currently owns 52% of the shares.

Alternative forms of consideration for Company D being considered are as follows:

• Cash payment, financed by new borrowing

• issue of new shares in Company C

Which of the following is an advantage of a cash offer over a share-for exchange from the viewpoint of the

original founder of Company C?

Options :

A : A share for share exchange would result in a significant change in control of Company C whereas a cash offer would not

B : A share-for-share exchange would require the approval shareholders in Company C but a cash offer would not.

C : A share-for-share exchange would require the approval of the Competition Authorities but a cash offer would not.

D : A cash offer would result in a lower gearing ratio therefore reduce the weighted overage cost of capital whereas a cash offer would not

Answer: A

Question 2

A company is planning to issue a 5 year $100 million bond at a fixed rate of 6%.

It is also considering whether or not to enter into a 10 year $100 million swap to receive 5% fixed and pay

Libor + 1% once a year.

The company predicts that Libor will be 4% over the life of the 5 years.

What is the impact of the swap on the company's annual interest cost assuming that

the Libor prediction is correct?

Options :

A : Increase by 1%.

B : Fall by 1%.

C : Remain the same.

D : Fall by 2%.

Answer: C

Question 3

Company J is in negotiations to acquire Company K and believes it can turn around Company K's

performance to match its own.

The following information is available for the two companies:

Select the maximum price for each share that Company J should place on Company K during negotiations.

Options :

A : $1.7

B : $2.0

C : $3.0

D : $3.2

Answer: C

Question 4

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 rate future?

Options :

A : It can be tailored to the exact reeds of the company.

B : It interest rates have gone down the price of the future will have fallen.

C : It must be kept for ne whole duration of the contract

D : The date is flexible and the position can be closed quickly and easily.

Answer: C

Question 5

A company is funded by:

• $40 million of debt (market value)

• $60 million of equity (market value)

The company plans to:

• Issue a bond and use the funds raised to buy back shares at their current market value.

• Structure the deal so that the market value of debt becomes equal to the market value of equity.

According to Modigliani and Miller's theory with tax and assuming a corporate income tax rate of 20%, this

plan would:

Options :

A : increase the company-s asset beta.

B : decrease the company-s equity beta.

C : increase shareholder wealth.

D : increase the market value of the company-s equity.

Answer: C

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