A company plans to raise finance for a new project.
It is considering either the issue of a redeemable cumulative preference share or a Eurobond.
Advise the directors which of the following statements would justify the issue of preference shares over a bond?

• A.If profits are poor, dividends do not have to be paid on the preference share - however, interest would need to be paid on the Eurobond.
• B.Preference shares are not secured against the assets of the business - however, the Eurobond would be.
• C.The issue of the preference share would reduce the company's gearing - however, the Eurobond would increase it.
• D.The company can claim tax relief on the dividend paid on the preference share at a higher rate than the interest paid on the Eurobond.

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Using the CAPM, the expected return for a company is 11%. The market return is 8% and the risk free rate is 2%.
What does the beta factor used in this calculation indicate about the risk of the company?

• A.It has greater risk than the average market risk.
• B.It has lower risk than the average market risk.
• C.It is not possible to tell from CAPM.
• D.It has the same risk as the average market risk.

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H Company has a fixed rate load at 10.0%, but wishes to swap to variable. It can borrow at LIBOR 8%.
The bank is currently quoting swap rates of 3.1% (bid) and 3.5% (ask).
What net rate will H Company pay if it enters into the swap?

• A.LIBOR +8%
• B.LIBOR +3.1%
• C.LIBOR +6.5%
• D.LIBOR +6.9%

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Company A is proposing a rights issue to finance a new investment. Its current debt to equity ratio is 10%.
Which TWO of the following statements are true?

• A.According to Modigliani and Miller's Theory of Capital Structure with tax, the rights issue will result in a lower cost of equity for Company A.
• B.Company A's current low gearing ratio may require a rights issue rather than a debt issue to finance the new project.
• C.The issue price has to be at least 20% below the pre-rights share price.
• D.The actual ex-rights price may be higher than the theoretical ex-rights price due to the value created from the project.
• E.The issue price of new shares should be set to guarantee the full take up of shares offered.

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A company's dividend policy is to pay out 50% of its earnings.
Its most recent earnings per share was $0.50, and it has just paid a dividend per share of $0.25.
Currently, dividends are forecast to grow at 2% each year in perpetuity and the cost of equity is 10.5%.
In order to grow its earnings and dividends, the company is considering undertaking a new investment funded entirely by debt finance. If the investment is undertaken:
* Its cost of equity will immediately increase to 12% due to the increased finance risk.
* Its earnings and dividends will immediately commence growing at 4% each year in perpetuity.
Which of the following is the expected percentage change in the share price if the new investment is undertaken?

• A.Decrease = 7.7%
• B.Increase = 8.3%
• C.Increase = 2%
• D.Increase = 10.5%

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