PFM 6-1

271. Winner Co is considering acquiring the ordinary share capital of Cenver Cenver Co has for years generated an annual cash inflow of $10m. For a one-off investment of $6m in new machinery, earnings for Cenver Co can be increased by $2m per year. Winner Co has a cost of capital of 10%. What is the value of Cenver Co?

272. PQR Co. has 7% loan notes in issue which are redeemable in 7 years’ time at a 5% premium to their nominal value of $100 per loan note. The before-tax cost of debt of the company is 9%and the after-tax cost of debt of PQR Co. is 6%.What is the current market value of each loan note?

273. A company has in issue loan notes with a nominal value of $100 each. Interest on the loan notes is 6% per year, payable annually. The loan notes will be redeemed in eight years’ time at a 5% premium to nominal value. The before-tax cost of debt of the company is 7% per year. What is the ex interest market value of each loan note?

274. An individual has been left $30,000 which he plans to invest on the Stock Exchange in order to have a source of capital should be decide to start his own business in a few years’ time. A friend of his who works in the City of London has told him that the London Stock Exchange shows strong form market efficiency.

If this is the case, which of the following investment strategies should Mr Mays follow?

275. Heritance plc has announced a 1 for 4 rights issue at a subscription price of $2.50. The current cum-rights price of the shares is $4.10. What is the new ex-div market value of the shares?

276. Quest Co has just paid a dividend of 21 cents per share and its share price one year ago was $3.10 per share. The total shareholder return for the year was 19.7%. What is the current share price (to two decimal places)?

277. A company has 7% loan notes in issue which are redeemable in seven years’ time at a 5% premium to their nominal value of $100 per loan note. The before-tax cost of debt of the company is 9% and the after-tax cost of debt of the company is 6%. What is the current market value of each loan note (to two decimal places)?

278. John Co and Ben Co are two companies in different industries who are both evaluating the acquisition of the same target company called Genna Genna Co is in the same industry as John Co.

John Co has valued Genna Co at $100m but Ben Co has only valued Genna Co at $90m. Which of following statements would explain why John Co’s value of Genna Co is higher?

279. Holly Co is a company which is financed by equity only. It has just paid a dividend of $60m and earnings retained and invested were 60%. Return on investments is 20% and the cost of equity is 22%. What is the market value of the company (in millions, to the nearest whole million)?

280. Gamma Co has in issue 5% irredeemable loan notes, nominal value of $100 per loan note, on which interest is shortly to be paid. Black Co has a before-tax cost of debt of 10% and corporation tax is 30%.What is the current market value of one loan note?

281. An investor believes that they can make abnormal returns by studying past share price movements. In terms of capital market efficiency, to which of the following does the investor’s belief relate?

282. The following data relates to an all equity financed company. Dividend just paid $50m Earnings retained and invested 70% Return on investments 15% Cost of equity 25% What is the market value of the company (to the nearest million dollars)?

283. The following information relates to two companies, A plc and B plc.

A plc           B plc

Earnings after tax        $210,000     $900,000

P/E ratio                            16               21

B plc’s management estimate that if they were to acquire A plc they could save $100,000 annually after tax on administrative costs in running the new joint company. Additionally, they estimate that the P/E ratio of the new company would be 18. On the basis of these estimates, what is the maximum that the shareholders of B plc should pay for the entire share capital of A plc? (To the nearest million)

284. MKB Ltd is an unlisted accountancy firm owned by three shareholders. One of the shareholders has asked for an independent valuation of the company to be performed. Which of the following is a valid reason for an independent valuation to be required?

285. The following financial information relates to Shakir Co, whose ordinary shares have a nominal value of $0.50 per share:

On an historic basis, what is the net asset value per share of Shakir Co?

286. The shares of Shire plc are currently valued on a P/E ratio of 8. The company is considering a takeover bid for Seed Limited, but the shareholders of Seed have indicated that they would not accept an offer unless it values their shares on a P/E multiple of at least 10. Which TWO of the following are reasons which might justify an offer by Shire plc for the shares of Seed on a higher P/E multiple?

287. Indicate, by clicking in the relevant boxes, whether the following statements are true or false.

A. The existence of projects with positive expected net present values contradicts the idea that the stock market is strong-form efficient.

B. The existence of information content in dividends contradicts the idea that the stock market is strongform efficient

288. Loner Co recently paid a dividend of $0.50 a share. This is $0.10 more than three years ago. Shareholders have a required rate of return of 10%. Using the dividend valuation model and assuming recent dividend growth is expected to continue, what is the current value of a share (to two decimal places)?

289. Cant Co has a cost of equity of 10% and has forecast its future dividends as follows:

Current year: No dividend

Year 1: No dividend

Year 2: $0.25 per share

Year 3: $0.50 per share and increasing by 3% per year in subsequent years

What is the current share price of Cant Co using the dividend valuation model?

290. Asset-based business valuations using net realisable values are useful in which of the following situations?

291. Asotle Co has paid the following dividends per share in recent years:

The dividend for 2013 has just been paid and Asotle Co has a cost of equity of 16%.

Using the historical dividend growth rate and the dividend growth model, what is the market price of Asotle Co shares to the nearest cent on an ex dividend basis?

292. In relation to capital markets, which of the following statements is true?

293. Which of the following statements is true in relation to business valuation?

294. A company has annual after-tax operating cash flows of $2 million per year which are expected to continue in perpetuity. The company has a cost of equity of 10%, a before-tax cost of debt of 5% and an after-tax weighted average cost of capital of 8% per year. Corporation tax is 20%.

What is the theoretical value of the company?

295. Hussle Co has in issue 6% loan notes which are redeemable at their nominal value of $100 in three years’ time. Alternatively, each loan may be converted on that date into 30 ordinary shares of the company.

The current ordinary share price of Hussle Co is $3.50 and this is expected to grow at 4% per year for the foreseeable future.

Hussle Co has a pre-tax cost of debt of 5% per year. What is the current market value of each $100 convertible loan note?

296. A company has just paid an ordinary share dividend of 32.0 cents and is expected to pay a dividend of 33.6 cents in one year’s time. The company has a cost of equity of 13%. What is the market price of the company’s shares to the nearest cent on an ex dividend basis?