On 31 October 20X3:
• A company expected to agree a foreign currency transaction in January 20X4 for settlement on 31
March 20X4.
• The company hedged the currency risk using a forward contract at nil cost for
settlement on 31 March 20X4.
• The transaction was correctly treated as a cash flow hedge in accordance with IAS 39 Financial
Instruments: Recognition and Measurement.
On 31 December 20X3, the financial year end, the fair value of the forward contract was $10,000
(asset).
How should the increase in the fair value of the forward contract be treated within the financial
statements for the year ended 31 December 20X3?
Answer:D
Question — (Single Choice)
A company is funded by:
• $40 million of debt (market value)
• $60 million of equity (market value)
The company plans to:
• Issue a bond and use the funds raised to buy back shares at their current market value.
• Structure the deal so that the market value of debt becomes equal to the market value of equity.
According to Modigliani and Miller's theory with tax and assuming a corporate income tax rate of
20%, this plan would:
Answer:C
Question — (Multiple Choices)
A company has 6 million shares in issue. Each share has a market value of $4.00.
$9 million is to be raised using a rights issue.
Two directors disagree on the discount to be offered when the new shares are issued.
• Director A proposes a discount of 25%
• Director B proposes a discount of 30%
Which THREE of the following statements are most likely to be correct?
Answer:B, C, D
Question — (Single Choice)
A wholly equity financed company has the following objectives:
1. Increase in profit before interest and tax by at least 10% per year.
2. Maintain a dividend payout ratio of 40% of earnings per year.
Relevant data:
• There are 2 million shares in issue.
• Profit before interest and tax in the last financial year was $5 million.
• The corporate income tax rate is 30%.
At the beginning of the current financial year, the company raised long term debt of $2 million at
10% interest each year.
Calculate the dividend per share that will be announced this year assuming the company achieves its
objective of increasing profit before interest and tax by 10%.
Answer:A
Question — (Multiple Choices)
When valuing an unlisted company, a P/E ratio for a similar listed company may be used but
adjustments to the P/E ratio may be necessary.
Which THREE of the following factors would justify a reduction in the proxy p/e ratio before use?
Answer:A, B, C
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