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Company A is planning to acquire Company B. Both companies are listed and are of similar size based on market capitalisation No approach has yet been made to Company B's shareholders as the directors of Company A are undecided about the most suitable method of financing the offer Two methods are under consideration a share exchange or a cash offer financed by debt.

Company A currently has a gearing ratio (debt to debt plus equity) of 30% based on market values. The average gearing ratio (debt to debt plus equity) for the industry is 50% Although no formal offer has been made there have been market rumours of the proposed bid. which is seen as favorable to Company

AAs a consequence. Company As share price has risen over the past few weeks while Company B's share price has fallen.
Which THREE of the following statements are most likely to be correct?

ABased on current share price movements, a share exchange would mean Company A has to issue fewer shares to acquire Company B than it would have done a few weeks ago

BCompany B's shareholders will be able to participate in the future growth of the combined business if it is a share exchange

CThe method of finance chosen will not affect the post-acquisition earning per share of the combined business

DCompany A's weighted average cost of capital will fall if financing is with debt

ECompany A's gearing will increase following a share exchange.

Question 2

A company aims to increase profit beforeinterest and tax(PBIT) each year.

The company reports in A$ but has significant export sales priced in B$.

All other transactions are priced in A$.

In 20X1, the company reported:

In 20X2, the only changes expected are:

* An increase in export prices of 10%, but no change to units sold.

* A rise in the value of the B$ to A$/B$ 2.500 (that is, A$ 1 = B$ 2.5)

Is it likely that the company would still meet its objective to grow PBIT between 20X1 and 20X2?

AYes, PBIT would increase by A$ 48 million.

BNo, PBIT would fall by A$ 48 million.

CYes, PBIT would increase by A$ 150 million.

DNo, PBIT would fall by A$ 150 million.

Question 3

Company A has a cash surplus.

The discount rate used fora typical project is the company's weighted average cost of capital of 10%.

No investment projects willbeavailablefor at least 2 years.

Which of the following is currentlymost likely to increase shareholder wealth in respect of the surplus cash?

AInvesting in a 2 year bond returning 5% each year.

BInvesting in the local money market at 4% each year.

CMaintaining the cash in a current account.

DPaying the surplus cash as a dividend at the earliest opportunity.

Question 4

A company is deciding whether to offer a scrip dividend or a cash dividend to its shareholders.

Although the company has excellent long-term growthprospects, it is experiencing short-term profit and cash flow problems.

Which of the following statements is most likely to be a reason for choosing the scrip dividend?

AIt is a way of raising additional finance to promote future growth.

BIt is a way of increasing earnings per share.

CIt is a way of encouraging shareholders to allow cash to be retained in the business.

DIt is a way of increasing dividend per share.

Question 5

A listed company in a high technology industry has decided to value its intellectual capitalusing 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.

A228 million

B289 million

C531 million

D325 million

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