Two companies that operate in the same industry have different Price/Earnings (P/E) ratios as follows:

Which of the following is the most likely of the different P/E ratios?

• A.Company B has higher expected future growth than Company A.
• B.Company B has higher gearing than Company A.
• C.Company B has higher business risk than Company A.
• D.Company B has a greater profit this year than Company A.

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KKL is a listed sports clothing company with three separate business units. KKL is seeking to sell TT', one of these business units TTP cwns a new. brand of trail running shoes that have Droved hugely popular with lone distance runners.
The management team of TTP are frustrated by the constraints imposes b/ KKL in managing tie brand and developing. the bus ness and they believe that TTF has huge growth potential.
The management team of TTP have approached KKL with a proposal to purchase 1~P through a management layout (MDO). KKL has accepted this proposal as TTP has not proved to be a good fit' with the rest of the business and has agreed on the selling price.
Which THREE of the following factors a-e mast Likely to affect the success of the MBO?

• A.The ability the TTP management team to develop the brand and achieve the expected growth.
• B.The constraints imposed by KKL managing TTF's brand.
• C.The motivation of the TTP management team to invest in future growth.
• D.Searing sufficient. funding for the MBO.
• E.The ability of the TTF management team to take over the head office functions successfully.

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A company raised fixed rate bank finance together with an interest rate swap for the same term and same principal value to pay floating receive fixed rate interest on an annual basis.
Which THREE of the following statements are correct?

• A.On the first day of this arrangement, the company receives the principal borrowed from the bank and pays this across to the swap counterparty.
• B.The company has effectively obtained floating rate debt.
• C.Under the swap, interest is exchanged every year.
• D.The swap contract is normally a contract between a company and a bank.
• E.LIBID (London Interbank Bid Rate) is normally used as the reference rate for determining interest due under the swap.

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XYZ has a variable rate loan of $200 million on which it is paying interest of Liber ' 3%.
XYZ entered into a swap with AG bank to convert this to a fixed rate 8% loan. AB bank charges an annual commission of 0.4% for making this arrangement
Calculate the net payment from KYZ to AB bank at the end of the first year if Libor was 2% throughout the year.
Give your answer in $ million, to one decimal place.

• A.22.8
• B.22.9

Correct Answer: A

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A listed company plans to raise $350 million to finance a major expansion programme.
The cash flow projections for the programme are subject to considerable variability.
Brief details of the programme have been public knowledge for a few weeks.
The directors are considering two financing options, either a rights issue at a 20% discount to current share price or a long term bond.
The following data is relevant:
The company's share price has fallen by 5% over the past 3 months compared with a fall in the market of
3% over the same period.
The directors favour the bond option.
However, the Chief Accountant has provided arguments for a rights issue.
Which TWO of the following arguments in favour of a right issue are correct?

• A.The WACC will decrease assuming Modigliani and Miller's Theory of Capital Structure without taxes applies.
• B.The recent fall in the share price makes a rights issue more attractive to the company.
• C.The issue of bonds might limit the availability of debt finance in the future.
• D.The administrative costs of a rights issue will be lower.
• E.The rights issue will lead to less pressure on the operating cash flows of the programme.

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