250 The following information relates to the ordinary shares of BC.
Earnings per share 50c
Dividend cover 2.5
Published dividend yield 3.2%
The price of BC's ordinary shares implied by the data above is:
78c
153c
625c
3,906c
251 HP has 5 million $1 ordinary shares in issue, at a market value of $2.40 per share.
A proposed investment is expected to have a net present value of $1.6 million and require an initial investment of $3 million.
If the market is efficient and the share price moves immediately to reflect this information when the investment is announced, what is the new share price to the nearest $0.01?
$
252 The prices quoted on a stock exchange are observed to reflect only historical share price information and other historical information about a company. Which of the following best describes this form of market efficiency?
No efficiency
Weak form efficiency
Semi-strong form efficiency
Strong form efficiency
253 NO is planning to acquire ON. The directors of the two companies have been involved in secret talks with no public announcements being made. However the market price of ON’s shares has risen on the local stock exchange on the assumption that NO will make a bid for ON.
The local stock market is exhibiting what form of efficiency?
No efficiency
Weak form efficiency
Semi-strong form efficiency
Strong form efficiency
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254 KS has 50 million $1 shares in issue. The current share price is $2.30.
A proposed investment requires initial expenditure of $25 million. The present value of net cash flows generated by this investment is $40 million and KS does not need to raise any extra funds to finance it.
If the stock market is efficient and the share price moves to reflect this information on the day that the investment is announced, what is the share price likely to be at the end of the day?
$2.30
$2.60
$2.80
$3.10
255 The following data relates to CC for the year ended 31 December 20X4.
Operating profit 240 $m
Depreciation and amortisation 60
Finance costs paid and due 20
Capital expenditure to sustain operations 75
Tax paid 45
Repayment of borrowings 55
Equity dividend paid 25
The best estimate of free cash flow to equity in $m is:
$ m
256 The following data relates to DF for the year ended 31 December 20X5.
$m
Profit before tax 360
Depreciation and amortisation 85
Finance costs paid and due 25
Capital expenditure to sustain operations 120
Tax paid 80
Repayment of borrowings 65
Equity dividend paid 40
The best estimate of free cash flow to equity in $m is:
$ m
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257 LK is using the Calculated Intangible Value method of company valuation to value its intangible assets.
LK’s average profit before tax is $50 million. The industry average return on tangible assets is 12%. LK’s tangible assets are $35 million. The tax rate is 30%. LK’s cost of equity is 11%, its WACC is 9% and its cost of debt is 6%.
Complete the calculation of CIV by placing one of the following numbers in each of the spaces.
0.09 0.11 1.09 1.11
0.70 0.30
CIV = ($50 million ─ (12% × $35 million)) × /
258 HM is using the Calculated Intangible Value method of company valuation to value its intangible assets.
HM’s average profit before tax is $70 million. The industry average return on tangible assets is 10%. HM’s tangible assets are $40 million. The tax rate is 25%. HM’s cost of equity is 13%, its WACC is 10% and its cost of debt is 6%.
Calculate the value of the intangible assets in $m.
$ m
259 Companies BC and DE operate in the same industry. They have the same level of earnings but company BC has a lower P/E ratio.
Which of the following can be deduced from the information about the two companies?
Company BC has higher growth prospects.
Company BC has lower market capitalisation.
Company BC’s shareholders are exposed to lower risk.
Company BC has a lower share price.
260 The following data is available about three companies.
Earnings
Rank the companies in descending order of market capitalisation.
A
B
C
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261 Zoe is an investor in Parkinson Co, holding 250 shares in the company, worth $565 at the cum div market price. Parkinson Co has just declared a dividend of $0.14 per share.
What is the ex-dividend value of Zoe’s shareholding?
$
262 LB would like to purchase AT, which is a private company. The latest accounting data for AT is as follows.
Assets (book value) 300 $m
Assets (realisable value) 340
Liabilities (excluding borrowings) 60
Borrowings (book value) 70
Borrowings (fair value) 90
Equity (book value) 170
What is the minimum purchase price for AT in $m on an asset valuation basis?
$ m
263 Which of the following is a description of the free cash flows to equity method that can be used to value a company’s equity?
Deduct interest and dividends to arrive at the free cash flow and then discount at the company’s WACC.
Deduct interest and dividends to arrive at the free cash flow and then discount at the company’s cost of equity.
Deduct interest but not dividends to arrive at the free cash flow and then discount at the company’s WACC.
Deduct interest but not dividends to arrive at the free cash flow and then discount at the company’s cost of equity.
264 The following data relates to GF for the year ended 31 December 20X7.
$m
Interest 150
Investment in non-current assets 500
Dividends 180
Operating profit 890
Investment in working capital 70
Depreciation 230
The tax rate is 25%.
Calculate GF’s free cash flow.
$ m
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265 MW is an all-equity financed company. Its forecast post-tax cash flows before finance costs for the next few years are expected to be as follows:
Year 1 Year 2 Year 3 Year 4
$m $m $m $m
340 380 440 510
The forecast has assumed that year 4 tax cash flows will be constant into perpetuity.
MW has a cost of capital of 10%.
What is the value of MW to the nearest $100m?
$ m
266 The forecast post-tax cash flows of PL before finance costs for the next few years are expected to be as follows:
Year 1 Year 2 Year 3 Year 4
$m $m $m $m
400 420 450 480
The forecast cash flows are expected to grow by 5% after Year 4 into perpetuity. PL looks to maintain a gearing ratio of 50% (measured as debt/debt + equity). PL has a cost of equity of 10%
and a weighted average cost of capital of 8%.
What is the value of PL’s equity to the nearest $100m?
$ m
267 YH’s accounts show that it has made a retained profit of $470m, after deducting finance costs of
$40m and dividends paid of $150m. Tax allowable deprecation was $15m. YH expects profits after tax to grow at 4% indefinitely.
YH reinvests cash to a value equal to tax allowable depreciation. YH’s cost of equity is 14% and its weighted average cost of capital is 11%.
Assuming profits are equivalent to cash flows, what is the value of YH’s equity capital in $m?
$ m
268 SR has 50 million $0.10 shares in issue. It generated $35m free cash flow last year and this figure is forecast to grow by 5% per annum each year.
SR’s cost of equity is 15% and its weighted average cost of capital is 12%. It has 5 million bonds in issue, trading at $90 per cent.
What is the estimated value of a share in SR to the nearest $0.01?
$
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269 UJ has 1 million $0.50 ordinary shares and 200,000 $0.50 preferred shares. Its ordinary shares are currently trading at $0.84. Its profit before tax was $240,000 and it paid tax at 25%, an ordinary dividend of $40,000 and a preference dividend of $20,000.
What is UJ’s price-earnings ratio to two decimal places?
270 A low P/E ratio normally indicates:
Dividend payments are high.
The company’s growth prospects are poor.
The share is over-priced.
The company’s earnings have temporarily fallen.
271 YH has earnings per share of $1.80, a dividend cover of 5 and a dividend yield of 4%.
To the nearest $0.01, what is the current price of YH’s ordinary shares?
$
272 HD has earnings per share of $0.39, a dividend cover of 3 and a dividend yield of 4%. It has 2 million $0.50 equity shares in issue.
What is the current market capitalisation of HD’s ordinary shares?
$
273 TH has a P/E ratio of 8 and dividend cover of 4. Its share capital is 5 million $0.50 shares and its dividend is $0.10 per share.
What is the market price per share of TH, to the nearest $0.01?
$
274 MK has a P/E ratio of 12 and dividend cover of 2. Its share capital is 1 million $2 shares and its dividend is $0.40 per share.
What is the market capitalisation of MK?
$
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275 YY is a listed company. The following information is taken from its latest accounts.
$m
$0.50 ordinary shares 1,000
Share premium 2,400
$1 preferred shares 500
Reserves 6,200
5% bonds 600
The ordinary shares are trading at $1.90 and the preferred shares are not traded. The bonds are currently trading at $103 per cent.
What is the current equity market capitalisation of YY in $m?
$ m
276 The operating profit in BG’s latest set of accounts was $9.4m and its profit before tax was $8m.
The tax rate is 25%. BG’s P/E ratio is 15. BG has nominal share capital of $0.25 shares with a value of $2m.
What is the value per share of BG to the nearest $0.01?
$
277 AS’s current P/E ratio is 14. It has just paid a dividend of $4m and has a dividend cover of 5.
What is the market capitalisation of AS in $m, based on a P/E valuation?
$ m
278 NB’s current P/E ratio is 10. It has just paid a dividend of $2m, following its normal practice of retaining 80% of its earnings after tax .
What is the market capitalisation of NB in $m, based on a P/E valuation?
$ m
Use the following information to answer the next two questions MH is a private company with the following financial data.
Issued share capital $0.50 shares $5m
Profit after tax $10.5m
Dividends $8.4m
Cost of equity 10%
You are aware that -KJ, which is a listed company but otherwise similar in profile to MH, has recently made profits after tax of $15m and has a market capitalisation of $120m. When valuing a private company, it can be assumed that its value is 75% of an equivalent listed company.
279 What is the value of MH in $m, based on a P/E valuation, to the nearest $m?
$ m
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280 What is the value of MH in $m, based on the dividend valuation model, to the nearest $m?
$ m
281 HG is about to undertake an initial public offering of its shares on the stock exchange. It intends to list 25% of its 6 million shares.
HG’s Finance Director has prepared the following schedule of equity valuations per share:
$
Nominal value 1.00
Net assets – book value 1.65
Net assets – net realisable value 1.78
Dividend valuation model 2.10
Based on this data, what will be the most likely proceeds from the share issue?
$
282 Rachel has been left a legacy of $50,000 which she plans to invest on the local stock exchange.
She understands that the stock exchange shows strong-form efficiency.
If the stock market is strong-form efficient, which of the following investment strategies should Rachel follow?
Study the financial press and invest in shares that appear to be undervalued.
Invest in three or four stable companies and hold the shares long-term.
Invest in several different companies across a number of industry sectors.
Study the financial press for company announcements and invest in companies that have good growth prospects.
283 Share prices on a stock exchange are regularly observed to move when companies make announcements about the dividends they intend to pay out.
Which of the following best describes this form of market efficiency?
No efficiency
Weak form efficiency
Semi-strong form efficiency
Strong form efficiency
284 JW’s share capital consists of $0.25 shares with a nominal value of $2.5 million and a market capitalisation of $45 million. JW has just announced plans for a new investment that is expected to generate an NPV of $12 million.
Assuming strong form market efficiency, what will be the impact on the share price of JW?
No change
Increase by $0.30
Increase by $1.20
Increase by $4.80
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285 AJ is jointly owned by its three directors, who have taken no salary from the company but have drawn dividends. AJ’s latest profits after tax are $700,000. KJ, a larger company, has made an offer for 100% of AJ’s share capital. KJ intends to pay the new directors of AJ $100,000. The tax rate is 25% and KJ is using a P/E ratio of 8 to value AJ.
What is the value of AJ, based on a P/E valuation?
$
286 YE has earnings per share of $0.80, dividend cover of 2 and dividend yield of 5%. What is the price of YE’s shares implied by this data to the nearest $0.01?
$
287 Which of the following are valid criticisms of the dividend valuation model? Select ALL that apply.
The cost of equity is difficult to establish with accuracy.
The model assumes that retained earnings will be reinvested to earn a return equal to the cost of equity, which may not be true.
The model assumes shareholders have no control over the level of dividends.
The model assumes that companies have sufficient earnings to maintain dividend growth levels, which may not be true.
The model assumes that the dividend growth rate exceeds the discount rate.
288 ST’s cost of equity is 11%, as calculated by the dividend growth model. ST has just paid a dividend of $0.60 per share. The market price of ST’s shares is $6.80.
Calculate the expected annual growth rate in dividends to the nearest 0.01%.
%
289 The following figures are taken from ON’s latest set of accounts.
$000
Sales 6,000
Operating profits 1,400
Depreciation 430
Finance costs paid 180
Tax 325
ON repaid $300,000 of debt during the year and spent $750,000 on tangible assets to replace obsolete assets. ON’s working capital fell by $210,000 during the year.
Calculate ON’s free cash flow.
$ m
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290 TR intends to pay a constant dividend of $0.84 on its $1 shares for the indefinite future. The cost of capital is 11%.
Assuming a dividend has just been paid, what is the current market value of the shares, to the nearest $0.01?
$
291 The following figures are taken from FT’s statement of financial position.
Goodwill $m 60
Non-current tangible assets 260
Current assets 140
$0.25 ordinary shares 10
6% $1 preferred shares 20
Retained profits 540
8% bank loan 130
Mezzanine debt 90
Current liabilities 36
To the nearest $0.01, what is the value of an ordinary share in FT using the net assets basis?
$
292 BX has paid the following dividends over the last few years, with the dividend for 20X8 having just been paid. BX’s cost of capital is 13% and the number of shares in issue over the period has remained constant.
Using the dividend valuation model and the information above, what is the market value per share of BX’s shares to the nearest $?
$
293 XG looks to achieve constant growth of dividend each year, as well as retaining 40% of after-tax earnings for future investment. XG has just paid a dividend of $0.75. It can invest the funds it earns at 11%, which is also its cost of capital.
Using the dividend valuation model and the information above, what is the market value per share of XG’s shares to the nearest $0.1?
$
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294 The shares of CT have a market price of $1.60. The dividend in a year’s time is expected to be
$0.12 per share. The required return is 14%. The board of CT wishes to increase dividends at a constant rate each year.
Using the dividend valuation model, what is the expected growth rate of dividends each year to the nearest 0.01%?
%
295 LZ is an all-equity financed company with a cost of capital of 14%. It is forecast to make constant post-tax profits of $2 million. LZ pays all its profits out as dividends. LZ has 4 million shares in issue. LZ is considering a project that would cost $4 million and generate additional earnings before interest and tax of $1.2 million. The project would be financed by an 8% bond. The cost of equity would rise to 15% but all earnings would continue to be paid out as dividends. The tax rate is 20%.
Assuming the market shows semi-strong efficiency, by how much to the nearest $0.01 would the market price per share increase when the project is announced?
$
296 NB is an all-equity financed company with a cost of equity of 10%. It is considering raising
$12 million to finance a new investment that will carry the same business risk as NB’s current operations. NB’s directors are considering raising this finance either in the form of a rights issue or an 8% bond. The tax rate is 25%.
Excluding interest on the bond, forecast post-tax earnings for NB would be predicted to be $20 million in the first year after the new investment and remain constant after that.
What would be the valuation of NB’s equity according to Modigliani and Miller’s theory with tax if it issued the bond and undertook the investment?
$ m
297 GG is all-equity financed and has 2 million shares in issue with a market value of $7.50. GG is considering issuing $5 million worth of debt and using the proceeds to repurchase some of the share capital. The tax rate is 25%.
What would be the market value per share of the remaining shares, to the nearest $0.01?
$
298 MJ has 2 million $1 shares in issue. MJ paid a dividend of $100,000 last year and some of its shareholders have indicated that they expect this dividend level to be maintained this year.
However MJ is currently suffering from a temporary shortage of cash and its directors are considering offering shareholders a 1 for 20 scrip dividend. Profits after tax are expected to be
$150,000 and the current market price of MJ’s shares is $3.50 per share. MJ has accumulated reserves of $840,000.
What is the expected market price of MJ’s shares after the scrip issue?
$
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299 The following data is available about HJ.
Tangible assets $120m
Industry return on tangible assets 16%
Profit before tax $36m
Tax rate 25%
Weighted average cost of capital 10%
Cost of equity 15%
Using the Calculated Intangible Value method, calculate the value of HJ’s intangible assets.
$ m