Question 1

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 2

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 3

A company’s statement of financial position includes non-current assets which are leased, the tax regime

follows the accounting treatment.

Which cash flows should be discounted when evaluating the cost of lease finance?

Options :

A : Lease payments, implied interested and straight-line accounting deprediation.

B : Lease payments and straight-line accounting depreciation.

C : Lease payments and implied interest.

D : Lease payments, tax relief on implied interest and tax relief on straight-line account depreciation.

Answer: B

Question 4

Company P is a large unlisted food-processing company.

Its current profit before interest and taxation is $4 million, which it expects to be maintainable in the future.

It has a $10 million long-term loan on which it pays interest of 10%.

Corporate tax is paid at the rate of 20%.

The following information on P/E multiples is available:

Which of the following is the best indication of the equity value of Company P?

Options :

A : $80 million

B : $40 million

C : $48 million

D : $24 million

Answer: D

Question 5

A company gas a large cash balance but its directors have been unable to identify any positive NPV projects to invest in. Which THREE of the following are advantages of a share repurchase, compared with a one-off large dividend?

Options :

A : The shareholder can choose whether to take the cast or not.

B : It increases the number of shares issue.

C : It means that the company will be able to pay lower total dividends in the future.

D : It returns cash to shareholders so that they can choose hew to spend It

E : It will not create an expectation for future increased dividends.

Answer: A,D

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