A company has:· 10 million $1 ordinary shares in issue· A current share price of $5.00 a share· A WACC of 15%The company holds $10 million in cash. No interest is earned on this cash.It will invest this in a project with an expected NPV of $4 million.In a semi-strong efficient stock market, which of the following is the most likely share price immediately after the announcement of the new investment?
Answer(s): A
A company has in a 5% corporate bond in issue on which there are two loan covenants.· Interest cover must not fall below 3 times· Retained earnings for the year must not fall below $3.5 millionThe Company has 200 million shares in issue.The most recent dividend per share was $0.04.The Company intends increasing dividends by 10% next year.Financial projections for next year are as follows:Advise the Board of Directors which of the following will be the status of compliance with the loan covenants next year?
Answer(s): C
A company wishes to raise additional debt finance and is assessing the impact this will have on key ratios.The following data currently applies:· Profit before interest and tax for the current year is $500,000· Long term debt of $300,000 at a fixed interest rate of 5%· 250,000 shares in issue with a share price of $8The company plans to borrow an additional $200,000 on the first day of the year to invest in new project which will improve annual profit before interest and tax by $24,000.The additional debt would carry an interest rate of 3%.Assume the number of shares in issue remain constant but the share price will increase to $8.50 after the investment.The rate of corporate income tax is 30%.After the investment, which of the following statements is correct?
Answer(s): B
A new company was set up two years ago using the personal financial resources of the founders.These funds were used to acquire suitable premises.The company has entered into a long-term lease on the premises which are not yet fully fitted out.The founders are considering requesting loan finance from the company's bank to fund the purchase of custom-made advanced technology equipment.No other companies are using this type of equipment.The company expects to continue to be profitable for the forseeable future.It re-invests some of its surplus cash in on-going essential research and development.Which THREE of the following features are likely to be considered negatives by the bank when assessing the company's credit-worthiness?
Answer(s): A,C,E
Company Y plans to diversify into an activity where Company X has an equity beta of 1.6, a debt beta of zero and gearing of 50% (debt/debt plus equity).The risk-free rate of return is 5% and the market portfolio is expected to return 10%.The rate of corporate income tax is 30%.What would be the risk-adjusted cost of equity if Company Y has 60% equity and 40% debt?
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