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

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 3

Company A is located in Country A, where the currency is the A$.

It is listed on the local stock market which was set up 10 years ago.

It plans a takeover of Company B, which is located in Country B where the currency is the B$, and where the

stock market has been operating for over 100 years.

Company A is considering how to finance the acquisition, and how the shareholders of Company B might

respond to a share exchange or cash (paid in B$).

Which of the following is likely to explain why the shareholders of Company B would prefer a share exchange

as opposed to a cash offer?

Options :

A : It would allow them to realise their investment and make a capital gain.

B : It would avoid them being exposed to foreign currency risk.

C : They would receive shares in a market that is likely to be more efficient.

D : It would enable them to benefit from the future performance of the combined entity.

Answer: D

Question 4

A listed company in a high technology industry has decided to value its intellectual capital using the

Calculated Intangible Value method (CIV).

Relevant data for the company:

• Pays corporate income tax at 30%

• Cost of equity is 9%, pre-tax cost of debt is 7% and the WACC is 8%

• The value spread has been calculated as $26 million

Calculate the CIV for the company.

Options :

A : 228 million

B : 289 million

C : 531 million

D : 325 million

Answer: A

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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