Question 1

Company A is planning to acquire Company B at a price of $ 65 million by means of a cash bid.

Company A is confident that the merged entity can achieve the same price earnings ratio as that of Company

A.

What does Company A expect the value of the merged entity to be post acquisition?

Options :

A : $122.5 million

B : $156.0 million

C : $187.5 million

D : $207.0 million

Answer: A

Question 2

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?

Options :

A : Tax relief on tax depreciation allowances

B : Bank loan payments

C : Maintenance payments

D : Lease payments

E : Tax relief on the book depreciation

Answer: A,D

Question 3

A company based in Country D, whose currency is the D$, has an objective of maintaining an operating profit

margin of at least 10?ch year.

Relevant data:

• The company makes sales to Country E whose currency is the E$. It also makes sales to Country F whose

currency is the F$.

• All purchases are from Country G whose currency is the G$.

• The settlement of all transactions is in the currency of the customer or supplier.

Which of the following changes would be most likely to help the company achieve its objective?

Options :

A : The D$ strengthens against the E$ over time.

B : The F$ weakens against the D$ over time.

C : The D$ strengthens against the G$ over time.

D : The D$ weakens against the G$ over time.

Answer: C

Question 4

The directors of a financial services company need to calculate a valuation of their company’s equity in

preparation for an upcoming initial Public Offering (IPO) of shares. At a recent board meeting they discussed

the various methods of business valuation.

The Chief Executive suggested using a Price-earing (P./E) method of valuation, but the finance Director

argued that a valuation based on forecast cash flows to equity would be more appropriate.

Which THREE of the following are advantages of valuation based on forecast cash flows to equity, compared

to a valuating using a price earnings methods?

Options :

A : Using cash is theoretically superior to using profits in a valuation calculation.

B : It give on estimate of the likely shareholder value that will be created.

C : The calculations are much simpler.

D : It incorporates the time value of money.

E : It avoids the problem of having to forecast a sustainable level of future growth.

Answer: A,C,D

Question 5

A company has:

• 10 million $1 ordinary shares in issue

• A current share price of $5.00 a share

• A WACC of 15%

The company holds $10 million in cash. No interest is earned on this cash.

It will invest this in a project with an expected NPV of $4 million.

In a semi-strong efficient stock market, which of the following is the most likely share price immediately after

the announcement of the new investment?

Options :

A : $5.40

B : $6.40

C : $6.80

D : $5.30

Answer: A

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