Question 1

An analyst has valued a company using the free cash flow valuation model.

The analyst used the following data in determining the value:

• Estimated free cashflow in 1 year's time = $100,000

• Estimated growth in free cashflow after the first year = 5?ch year indefinitely

• Appropriate cost of equity = 10%

The result produced by the analyst was as follows:

Value of equity = $100,000 (1+0.05)/0.10 = $1,050,000

The analyst made a number of errors in determining the value.

By how much has the analyst undervalued the company?

Options :

A : $950,000

B : $2,000,000

C : $2,100,000

D : $1,050,000

Answer: A

Question 2

Which THREE of the following would be most important if a hospital wishes to review the effectiveness of its services?

Options :

A : The proportion of surgical procedures that are deemed to be successful.

B : Average waiting times for treatment.

C : Patient satisfaction ratings.

D : Staff costs compared to previous years.

E : Revenue generated from car park charges.

Answer: A,B,C

Question 3

When valuing an unlisted company, a P/E ratio for a similar listed company may be used but adjustments to

the P/E ratio may be necessary.

Which THREE of the following factors would justify a reduction in the proxy p/e ratio before use?

Options :

A : The relative lack of marketability of unlisted company shares.

B : A lower level of scrutiny and regulation for unlisted companies.

C : Unlisted companies being generally smaller and less established.

D : Control premium not being included within the proxy p/e ratio used.

E : The forecast earnings growth being relatively higher in the unlisted company.

F : A profit item within the unlisted company-s latest earnings which will not reoccur.

Answer: A,B,C

Question 4

Two listed companies in the same industry are joining together through a merger.

What are the likely outcomes that will occur after the merger has happened?

Select ALL that apply

Options :

A : Increase in customer base.

B : Competition authorities step in to stop a potential price monopoly.

C : Decrease in employee motivation due to internal changes.

D : Changes to supplier relationships owing to internal changes.

E : Cost savings from synergistic benefits and economies of scale.

Answer: A,C,D

Question 5

Company Z has just completed the all-cash acquisition of Company A.

Both companies operate in the advertising industry.

The market considered the acquisition a positive strategic move by Company Z.

Which THREE of the following will the shareholders of Company Z expect the company's directors to

prioritise following the acquisition?

Options :

A : The realisation of anticipated post-acquisition synergies.

B : The development of a dividend policy to meet the expectations of the target company shareholders.

C : The integration and retention of key employees.

D : The regulatory approval required to complete the acquisition.

E : The retention of key customers of the acquired company.

Answer: A,C

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