Question 1

Company U has made a bid for the entire share capital of Company B.

Company U is offering the shareholders in Company B the option of either a share exchange or a cash

alternative.

Advise the shareholders in Company B which THREE of the following would be considered disadvantages of

accepting the cash consideration?

Options :

A : Cash consideration is certain whereas Company U-s future share price performance is uncertain.

B : Interest rates on deposit accounts are currently at a historic low and are expected to remain low.

C : Company U is not expected to change its dividend policy post-acquisition.

D : Taxation is payable on realised capital gains.

E : There will be no opportunity to participate in the future economic success of Company U.

Answer: A,B,D

Question 2

A company’s statement of financial position includes non-current assets which are leased, the tax regimefollows 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 3

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

Question 4

For which THREE of the following risk categories does IFRS 7 require sensitivity analysis?

Options :

A : Currency risk

B : Liquidity risk

C : Interest rate risk

D : Commodity risk

E : Credit risk

F : Supply chain risk

Answer: A,C,D

Question 5

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 = $1,050,000The 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

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