Question 1

A listed company in a high growth industry, where innovation is a key driver of success has always operated a

residual dividend policy, resulting in volatility in dividends due to periodic significant investments in research

and development.

The company has recently come under pressure from some investors to change its dividend policy so that

shareholders receive a consistent growing dividend. In addition, they suggested that the company should use

more debt finance.

If the suggested change is made to the financial policies, which THREE of the following statements are true?

Options :

A : It may give a signal to the market that the company is entering a period of stable growth.

B : There may be a change to the shareholder profile due to 'the clientele effect'.

C : The directors will not have to take shareholder dividend preferences into consideration in future.

D : Retained earnings have a lower cost than debt finance.

E : The company-s financial risk will increase due to its increased use of debt finance.

Answer: A,B

Question 2

Company A needs to raise AS500 mi lion to invest in a new project and is considering using a pub ic issue of

bonds to finance the investment.

Which THREE of the following statements-relating to this bond issue are true?

Options :

A : A company must be listed before it can issue bones.

B : The largest issuer of bond i3 the government.

C : Purchasing bonds in the capital markets enables entities to borrow large amounts of finance.

D : The bond market is unregulated making it easier to raise finance

E : Bonds issues in the corporate debt market are underwritten.

Answer: A,B,C

Question 3

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

Question 4

A company plans to acquire new machinery.

It has two financing options; buy outright using a bank loan, or a finance lease.

Which of the following is an advantage of a finance lease compared with a bank loan?

Options :

A : It is "off-balance sheet" and will not affect the company-s gearing.

B : The interest rate offered might be more favourable because the lessor has the security of the asset.

C : Tax depreciation allowances may be passed on to the company by the lessor.

D : The lessor provides maintenance of the asset.

Answer: B

Question 5

A company has accumulated a significant amount of excess cash which is not required for investment for the

foreseeable future.

It is currently on deposit, earning negligible returns.

The Board of Directors is considering returning this excess cash to shareholders using a share repurchase

programme.

The majority of shareholders are individuals with small shareholdings.

Which THREE of the following are advantages of the company undertaking a share repurchase programme?

Options :

A : Individual shareholders can realise their investment if they wish.

B : The earnings per share should increase for the shareholders who do not sell their shares.

C : It reduces excess cash which might have been attractive to predators.

D : It reduces the amount of cash for potential future investment opportunities.

E : Institutional investors generally prefer a constant predictable income in the form of dividends.

Answer: A,B,C

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