Answering Questions

  • Read each question carefully.
  • When you answer a question, your answer will automatically be saved.
  • You can revisit questions and change your answers at any time during the exam.
  • The only permitted characters for numerical answers are:
    • Numbers
    • One full stop as a decimal point if required
    • One minus symbol at the front of the figure if the answer is negative.

              For example: -10234.35

No other characters, including commas, are accepted.

Navigating between questions

  • Click Next Button to move to the next question.
  • Click Previous Button to move back to the previous question.
  • Click on a question number from the Exam Progress Details panel (see next page) to move directly to that question.
  • A message will be displayed when you click to move away from a question which has been partially attempted. You can choose to stay on the question and review your answer(s) or continue.
  • When reviewing your answer(s) for partially attempted questions ensure you read any message displayed in red text below the question in Section A or below the question
    part(s) in Section B

Phobis Co. (Dec 07 – Amended)

Phobis Co is considering a bid for Danoca Co. Both companies are stock-market listed and are in the same business sector. Financial information on Danoca Co, which is shortly to pay its annual dividend, is as follows:

Number of ordinary shares

5 million

 Ordinary share price (ex div basis)


Earnings per share


Proposed payout ratio


Dividend per share one year ago


Dividend per share two years ago


Equity beta


Other relevant financial information

Average sector price/earnings ratio


Risk-free rate of return


Return on the market



Calculate the value of Danoca Co using the following methods:

(i) price/earnings ratio method
(ii) dividend growth model

and discuss the significance, to Phobis Co, of the values you have calculated, in comparison to the current market value of Danoca Co.

B. Phobis Co has in issue 9% bonds which are redeemable at their par value of $100 in five years’ time. Alternatively, each bond may be converted on that date into 20 ordinary shares of the company. The current ordinary share price of Phobis Co is $4.45 and this is expected to grow at a rate of 6.5% per year for the foreseeable future. Phobis Co has a cost of debt of 7% per year.


Calculate the following current values for each $100 convertible bond:

(i) market value
(ii) floor value
(iii) conversion premium

C. Discuss the significance to a listed company if the stock market on which its shares are traded is shown to be semi-strong form efficient.

Leave a Reply

Your email address will not be published. Required fields are marked *