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F3 – Financial Strategy

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Showing 7–9 of 15 questions

Question 7

A listed company in a high growth industry where innovation is a key driver of success has always operated a residual dividend policy resulting in volatility in dividends due to periodic significant investments in research and development.

The company has recently come under pressure from some investors to change its dividend policy so that shareholders receive a consistent growing dividend. In addition they suggested that the company should use more debt finance.

If the suggested change is made to the financial policies which THREE of the following statements are true?

Select all that apply, then click Submit answer.

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    It may give a signal to the market that the company is entering a period of stable growth.

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    There may be a change to the shareholder profile due to 'the clientele effect'.

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    The directors will not have to take shareholder dividend preferences into consideration in future.

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    Retained earnings have a lower cost than debt finance.
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    The company's financial risk will increase due to its increased use of debt finance.
Question 8

Company F's current profit before interest and taxation is $5.0 million.

It has a 10% long-term corporate bond in issue with a nominal value of $10 million.

Corporate tax is paid at 25%.

The industry average P/E multiple is 10.

Company X has made an approach to acquire the entire share capital of Company F for $30 million.

Company X has announced that anticipated synergies (after interest and taxation) arising from its acquisition of Company F will be $1 million each year in perpetuity.

Advise the Board of Directors of Company F if the bid should be accepted based on the above information?

Select an option, then click Submit answer.

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    Accept the bid because Company F is potentially worth $30 million to Company X.
  • ○

    Reject the bid because Company F is potentially worth $40 million to Company X.
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    Reject the bid because Company F is potentially worth $50 million to Company X.
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    Reject the bid because Company F is potentially worth $60 million to Company X.
Question 9

A national airline has made an offer to acquire a smaller airline in the same country.

Which of the following would be of most concern to the competition authorities?

Select an option, then click Submit answer.

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    After the acquisition the board propose to reduce the number of flight destinations from the country.
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    The board informed a major institutional shareholder about the proposed acquisition before informing other shareholders.
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    After the acquisition the board propose to increase prices significantly on routes where no other airlines operate.
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    The acquisition is likely to result in significant redundancies of staff currently working for the smaller airline.