F3 Exam Dumps : Financial Strategy

A listed company has suffered a period of falling revenues and profit margins. It has been obliged to issue a profit warning to the market and its share price has fallen sharply. The company relies heavily on debt finance and is discussing with its banks possible refinancing options to assist with a restructuring programme.

Which THREE of the following are likely to be of MOST interest to the company's banks when they review the refinancing requests?

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% each 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 = $1,050,000

The analyst made a number of errors in determining the value. 

By how much has the analyst undervalued the company?

A company has a financial objective of maintaining a gearing ratio of between 30% and 40%, where gearing is defined as debt/equity at market values. 

The company has been affected by a recent economic downturn leading to a shortage of liquidity and a fall in the share price during 20X1.

On 31 December 20X1 the company was funded by:

•    Share capital of 4 million $1 shares trading at $4.0 per share.

•    Debt of $7 million floating rate borrowings.

The directors plan to raise $2 million additional borrowings in order to improve liquidity.  

They expect this to reassure investors about the company's liquidity position and result in a rise in the share price to $4.2 per share.

Is the planned increase in borrowings expected to help the company meet its gearing objective?