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 million
The 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?

• A.The company will be in compliance with both covenants.
• B.The company will be in breach of the covenant in respect of interest cover only.
• C.The company will breach the covenant in respect of retained earnings only.
• D.The company will be in breach of both covenants.

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Hospital X provides free healthcare to all members of the community, funded by the central Government.
Hospital Y provides healthcare which has to be paid for by the individual patients. It is a listed company, owned by a large number of shareholders.
In comparing the above two organisations and their objectives, which THREE of the following statements are correct?

• A.X is a not-for-profit organisation while Y is a for-profit organisation.
• B.The performance of X will be appraised primarily on the basis of value for money.
• C.X and Y have the same primary financial objective - to maximise shareholder wealth.
• D.Only Y is likely to have a mixture of financial and non-financial objectives.
• E.X and Y will have the same primary non financial objective - provision of quality of health care.

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A company needs to raise $20 million to finance a project.
It has decided on a rights issue at a discount of 20% to its current market share price.
There are currently 20 million shares in issue with a nominal value of $1 and a market price of $5 per share.
Calculate the terms of the rights issue.

• A.1 new share for every 4 existing shares
• B.1 new share for every 20 existing shares
• C.1 new share for every 5 existing shares
• D.1 new share for every 25 existing shares

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Company B is an all equity financed company with a cost of equity of 10%.
It is considering issuing bonds in order to achieve a gearing level of 20% debt and 80% equity.
These bonds will pay a coupon rate of 5% and have an interest yield of 6%.
Company B pays corporate tax at the rate of 25%.
According to Modigliani and Miller's theory of capital structure with tax, what will be Company B's new cost of equity?
A)

B)

C)

D)

• A.Option D
• B.Option C
• C.Option B
• D.Option A

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CI IJ has decided to move its production plant to overseas country X.
This would make the product cheaper to produce.
The technology used to make the product is very advanced and some of the skilled staff would have to move to country X.
The Production Director has identified that there are some political risks in moving to county X.
For each of the political risks of moving to country X shown below, select the correct method for reducing the risk.

Correct Answer:

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