F3 Exam Dumps : Financial Strategy

A listed company plans to raise $350 million to finance a major expansion programme.

The cash flow projections for the programme are subject to considerable variability.

Brief details of the programme have been public knowledge for a few weeks.

The directors are considering two financing options, either a rights issue at a 20% discount to current share price or a long term bond.

The following data is relevant:

The company's share price has fallen by 5% over the past 3 months compared with a fall in the market of 3% over the same period.

The directors favour the bond option.

However, the Chief Accountant has provided arguments for a rights issue.

Which TWO of the following arguments in favour of a right issue are correct?

A venture capitalist invests in a company by means of buying:

   • 9 million shares for $2 a share and

   • 8% bonds with a nominal value of $2 million, repayable at par in 3 years' time. 

The venture capitalist expects a return on the equity portion of the investment of at least 20% a year on a compound basis over the first 3 years of the investment.

The company has 10 million shares in issue.

What is the minimum total equity value for the company in 3 years' time required to satisify the venture capitalist's expected return?

Give your answer to the nearest $ million.

$   million.   

A company is considering whether to lease or buy an asset.

The following data applies:

   • The bank will charge interest at 7.14% per annum

   • The asset will cost $1 million

   • Tax-allowable depreciation is available on a straight line basis over 5 years

   • There is no residual value

   • Corporate tax is paid at 30% in the year when the profit is earned

What is the NPV of the buy option?

Give your answer to the nearest $000.

$ ?