450-485

Which of the following statements is true of a scrip issue with perfect information? A Decreases earnings per share B Decreases the debt/equity ratio (calculated on a market value basis) of the company C Increases individual shareholder wealth D Increases the market price of the share

• A

• B

• C

• D

Which of the following statements is part of the traditional theory of gearing? A) There must be taxes B) There must exist a minimum WACC C) Cost of debt increases as gearing decreases D) Cost of equity increases as gearing decreases

• A

• B

• C

• D

Which TWO of the following would be implied by a decrease in a company’s operating gearing ratio? A) The company is less profitable B) The company is less risky C) The company has a lower proportion of costs that are variable D) The company has profits which are less sensitive to changes in sales volume

• A and D

• B and C

• B and D

• A and B

A company has just declared an ordinary dividend of 25.6p per share; the cumdiv market price of an ordinary share is 280p. Assuming a dividend growth rate of 16% per annum, what is the company’s cost of equity capital (to one decimal place)?

• 27.70%

• 16.80%

• 28.20%

• 29.30%

Ingham plc’s capital structure is as follows: $m 50c ordinary shares 12 8% $1 preference shares 6 12.5% loan notes 20X6 8 ––– 26 ––– The loan notes are redeemable at nominal value in 20X6. The current market prices of the company’s securities are as follows. 50c ordinary shares 250c 8% $1 preference shares 92c 12.5% loan notes 20X6 $100 The company is paying corporation tax at the rate of 30%. The cost of the company’s ordinary equity capital has been estimated at 18% pa. What is the company’s weighted average cost of capital (to the nearest whole %) for capital investment appraisal purposes? A) 10% B) 14% C) 16% D) 17%

• A

• B

• C

• D

A company issued its 12% irredeemable loan notes at 95. The current market price is 92. The company is paying corporation tax at a rate of 30%. What is the current net cost of capital per annum of these loan notes (to one decimal place)?

• 10.00%

• 11.50%

• 9.10%

• 10.20%

Which TWO of the following statements concerning profit are correct? 1) Accounting profit is not the same as economic profit 2) Profit takes account of risk 3) Accounting profit can be manipulated by managers 4) Gross profit margin is calculated as gross profit divided by shareholder’s funds

• 1 and 4

• 2 and 4

• 1 and 3

• 2 and 3

Four companies are identical in all respects, except for their capital structures, which are as follows: A plc B plc C plc D plc % % % % Equity as a proportion of total market capitalisation 70 20 65 40 Debt as a proportion of total market capitalisation 30 80 35 60 The equity beta of A plc is 0.89 and the equity beta of D plc is 1.22. Within which ranges will the equity betas of B plc and C plc lie? A) The beta of B plc and the beta of C plc are both higher than 1.22 B) The beta of B plc is below 0.89 and the beta of C plc is in the range 0.89 to 1.22 C) The beta of B plc is above 1.22 and the beta of C plc is in the range 0.89 to 1.22 D) The beta of B plc is in the range 0.89 to 1.22 and the beta of C plc is higher than 1.22

• A

• B

• C

• D

Which of the following statements is correct? A) A bonus issue can be used to raise new equity finance B) A share repurchase scheme can increase both earnings per share and gearing C) Miller and Modigliani argued that the financing decision is more important than the dividend decision D) Shareholders usually have the power to increase dividends at annual general meetings of a company

• A

• B

• D

• C

The equity shares of Nice plc have a beta value of 0.80. The risk free rate of return is 6% and the market risk premium is 4%. Corporation tax is 30%. What is the required return on the shares of Nice plc (to one decimal place)?

• 9.00%

• 8.80%

• 9.20%

• 8.50%