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GG's gearing is currently 50% compared to the industry average of 40% (both measured as debt/equity). GG's debt is all in the form of a single bank loan that is repayable in five years' time. The directors of GG are seeking to raise finance for a new project and they are considering an additional bank loan from the same bank.

Which of the following would prevent the bank from lending the finance for the project in the form of a new bank loan?

Options:

A covenant on the existing bank loan that restricts the level of dividend that can be paid.

A projected decrease in interest cover that would breach a covenant on the existing loan.

The revaluation of GG's property that shows an increase in its value since the existing bank loan was taken out.

A projected lack of profits to be able to claim tax relief on the additional interest arising from the new loan.

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Question 2

The yield to maturity of a redeemable bond is calculated as the internal rate of return of the relevant cash flows associated with the bond.

Which TWO of the following are considered relevant cash flows in this calculation?

Options:

The annual interest payments net of tax relief.

The redemption value of the bond at the date of redemption.

The market value of the bond now.

The nominal value of the bond now.

The value of the conversion premium on conversion to equity shares.

Question 3

ST has in issue unquoted 7% debentures which were issued at par and are redeemable in 1 year's time. These debentures cannot be traded. The yield to maturity on these debentures has been calculated at 5%.

Which of the following would explain why the yield to maturity is lower than the coupon?

Options:

ST will benefit from the tax relief on the interest payment.

The debentures will be redeemed at a discount to their par value.

The debentures will be redeemed at their par value.

The market value of the debentures must be higher than their par value.

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