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NEW QUESTION 24
WW is a quoted manufacturing company. The Finance Director has addressed the shareholders during WW's annual general meeting-She has told the shareholders that WW raised equity during the year and used the funds to repay a large loan that was maturing, thereby reducing WW's gearing ratio
At the conclusion of the Finance Director's speech one of the shareholders complained that it had been foolish for WW to have used equity to repay debt The shareholder argued that the Modigliani and Miller model (with tax) offers proof that debt is cheaper than equity when companies pay tax on their profits.
Which THREE arguments could the Finance Director have used in response to the shareholder?
  • A. A lower gearing ratio creates greater flexibility for WW in the future
  • B. The shareholder was confusing the cost of capital with shareholder wealth
  • C. Reducing the gearing ratio has reduced the financial risk of WW which will benefit shareholders
  • D. A lower gearing ratio will result in an increase in the value of the company
  • E. The Modigliani and Miller model would only be valid in practice if WW's shareholders were aware of the model and believed in its validity
  • F. WW was approaching a debt covenant limit and it was therefore important to reduce gearing.
Answer: C,D,F

NEW QUESTION 25
Company XXY operates in country X with the X$ as its currency. It is looking to acquire company ZZY which operates in country Z with the Z$ as its currency.
The assistant accountant at Company XXY has started to prepare an initial valuation of Company ZZY's equity for the first 3 years, however their valuation is incomplete. TBC' in the table below indicates that her calculations have yet to be completed.
F3-019f59743cc0fa6d028f1c1f78343592.jpg

The following information is relevant:
F3-84baa237fa25364e44f275f0cab57d0e.jpg

What is the correct figure (to the nearest million S) to include in year 3 as the present value in X$ million?
  • A. X$401 million
  • B. X$360 million
  • C. X$453 million
  • D. X$504 million
Answer: B

NEW QUESTION 26
A company plans to cut its dividend but is concerned that the share price will fall.
This demonstrates the _____________ effect
Answer:
Explanation:
clientele

NEW QUESTION 27
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