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NEW QUESTION 39
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?
- A. $122.5 million
- B. $156.0 million
- C. $187.5 million
- D. $207.0 million
Answer: A
NEW QUESTION 40
A company has in a 5% corporate bond in issue on which there are two loan covenants.
* Interest cover must not fall below 3 times
* Retained earnings for the year must not fall below $3.5 million
The Company has 200 million shares in issue.
The most recent dividend per share was $0.04.
The Company intends increasing dividends by 10% next year.
Financial projections for next year are as follows:
Advise the Board of Directors which of the following will be the status of compliance with the loan covenants next year?
- A. The company will be in breach of both covenants.
- B. The company will be in compliance with both covenants.
- C. The company will be in breach of the covenant in respect of interest cover only.
- D. The company will breach the covenant in respect of retained earnings only.
Answer: D
NEW QUESTION 41
A company plans a four-year project which will be financed by either an operating lease or a bank loan.
Lease details:
* Four year lease contract.
* Annual lease rentals of $45,000, paid in advance on the 1st day of the year.
Other information:
* The interest rate payable on the bank borrowing is 10%.
* The capital cost of the project is $200,000 which would have to be paid at the beginning of the first year.
* A salvage or residual value of $100,000 is estimated at the end of the project's life.
* Purchased assets attract straight line tax depreciation allowances.
* Corporate income tax is 20% and is payable at the end of the year following the year to which it relates.
A lease-or-buy appraisal is shown below:
Which THREE of the following items are errors within the appraisal?
- A. Tax relief on lease payments have not been lagged correctly
- B. The bank loan repayments should be included
- C. The salvage value has been included within the lease option
- D. Lease payments are timed incorrectly
- E. Using the 10% discount rate is incorrect
- F. The project's operating cashflows should be included
Answer: A,C,E
NEW QUESTION 42
Hospital X provides free healthcare to all members of the community, funded by the central Government.
Hospital Y provides healthcare which has to be paid for by the individual patients. It is a listed company, owned by a large number of shareholders.
In comparing the above two organisations and their objectives, which THREE of the following statements are correct?
- A. X and Y will have the same primary non financial objective - provision of quality of health care.
- B. X and Y have the same primary financial objective - to maximise shareholder wealth.
- C. The performance of X will be appraised primarily on the basis of value for money.
- D. Only Y is likely to have a mixture of financial and non-financial objectives.
- E. X is a not-for-profit organisation while Y is a for-profit organisation.
Answer: A,C,E
NEW QUESTION 43
Company F's current profit before interest and taxation is $5.0 million.
It has a 10% long-term corporate bond in issue with a nominal value of $10 million.
Corporate tax is paid at 25%.
The industry average P/E multiple is 10.
Company X has made an approach to acquire the entire share capital of Company F for $30 million.
Company X has announced that anticipated synergies (after interest and taxation) arising from its acquisition of Company F will be $1 million each year in perpetuity.
Advise the Board of Directors of Company F if the bid should be accepted, based on the above information?
- A. Reject the bid because Company F is potentially worth $50 million to Company X.
- B. Reject the bid because Company F is potentially worth $40 million to Company X.
- C. Reject the bid because Company F is potentially worth $60 million to Company X.
- D. Accept the bid because Company F is potentially worth $30 million to Company X.
Answer: B
NEW QUESTION 44
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