Bristol plc has convertible debentures with a coupon rate of 10% in issue trading at 108%. The debentures are redeemable at par in five years time, or convertible at that point into 20 ordinary shares of the firm. The company's current share price is 3.50 and is expected to grow at 6% pa Bristol plc faces a corporation tax rate of 20%. Which of the following is the best estimate of the after tax cost of these debentures? A6% B8% C9% D 10% E 12% Question 7 Bath ple has in issue irredeemable bonds with a coupon rate of 4%, currently trading at 84% cum interest. If the tax rate changes from 25% to 20% for the company, what will happen to the after-tax cost of these bonds? A Increase to 5% B Decrease to 4.25% Increase to 4% D Decrease to 3.75% E The after-tax cost will not change Question 8 Taunton plc exists in a Modigliani and Miller (1958, 1963) world, except that corporate taxes exist at the rate of 20%. The firm's operating income before tax and interest is 400,000 p.a. The cost of capital for an all-equity financed firm in this world is 16% pa, and the pro-tax market cost of debt is 4% p.a. Taunton plc has debt in its capital structure with a market value of 1.5 million. What is the market value of Taunton plc? 2 million B 2.3 million 3 million D 3.3 million E 3.5 million COUW Question 9 Which of the following statements about Modigliani and Miller (M&M)'s capital structure propositions is most likely to be true? A According to M&M (1958), a firm with a higher financial gearing must always have a higher market value B M&M (1958) amended their model by recognising the existence of corporate tax According to M&M (1963), a company's weighted average cost of capital remains unchanged at all levels of gearing D According to M&M (1963), there is a linear relationship between the cost of equity and the level of gearing E Bankruptcy costs had been included in both M&M (1958) and M&M (1963) Question 10 Torquay plc exists in a Modigliani and Miller (1958, 1963) world, except that corporate taxes exist at the rate of 30%. The cost of capital for an all-equity financed firm in this world is 18% pa, and the pre-tax market cost of debt is 9% pa. Torquay plc is funded by way of 90 milion equity and 50 million debt (both at market values). What is Torquay ple's cost of equity capital? DOW 25.5% B 24% 23% D 21.5% E 20% SECTION B Question 1 UHG plc runs a hotel chain. Assume that it is now UHG pic's financial year end 31 March 2022. The firm is considering a three-year project to build and operate rapid Covid-19 screening facilities next to the hotels with a view to improving sales for the hotels The company hired a consultant at a cost of E100,000 paid in full last month), to assess the likely impact of these facilities on the hotels income. The findings by the consultant suggest that the most likely impact would be an increase in sales of 200 million p.a. (70% probability). But the consultant also suggests that dependent on the pandemic situation, the increase in sales for each of the three years could be as high as 300 million (10% probability) or as low as 50 million (20% probability) UHG plc generates a contribution of 40% on sales. This project will also lead to an incremental fixed costs of 30 million pa, and an allocated head office fixed costs 10 million pa The facilities will be built in a part of the company's premises which is currently rented out to a travel agent at an annual rent taxable) of 2 million, receivable in advance. The project also requires an investment of E100 million in equipment on 31 March 2022. The equipment attracts a 20% reducing balance) capital allowance and will be disposed of for 20 million after three years of use An investment in working capital of 500,000 will be required on 31 March 2022. This requirement will remain constant each year throughout the 3-year We of the project. Working capital will be fully recoverable on 31 March 2025 Corporation tax is payable at the rate of 25% and tax payment occurs in the same year as the cash flows to which it relates. An appropriate cost of capital to appraise the project is 125 pa. (a) Calculate the NPV of the Covid-19 screening facilities project as at 31 Mach 2022 and advise the company whether it should proceed with the project. (25 marks) (b) Calculate the sensitivity of the NPV to changes in the expected extra contribution. (5 marks) (Total 30 marks) Question 2 AZphyzer Lid is a biotechnology company founded five years ago by four partners. As a private firm, it has grown steadily, and developed a good reputation for the development of the latest therapeutics and vaccines. It is now at a major crossroads, and some important decisions need to be taken soon, especially about the sources of finance for the firm's potential projects in response to the Covid-19 pandemic. They would need to raise at least 100 million. They have few loans at present, and could raise considerably more. It has been suggested, though, that this is the time for the firm to go public and raise the money that way. It has also been mentioned that the company is in a great position to issue convertible bonds to finance their expansion Compare and contrast the different sources of finance available to AZphyzer Ltd, and discuss the factors governing the choice between different sources of funds. (30 marks) Question 1 Which of the following is always incorporated in an interest rate? A Risk premium B Accounting rate of return C The rate of pure le preference Date ofretum Einfation premium Question 2 in the context of corporate Trance, which of the following statements is moet wy to be false? Sound financial management is necessary for the achievement of stakeholder goals 8 Survival may be a ky short term objective for a fim, especially in times of economic but it cannot be a satisfactory long term objective Shareholder with a masived frough managers making sound investment and financing including dividend decisions D Shareholders do not act in the best interests of their managers ging ito The principal agent problem E comey costs are key to be higher when there exits there anymoutry of information between managers and Question Truro plc faces a demand of 6.000 units per month for one of its lines of stock. The firm's cost of holding stockis 2 per unit of average stock per month and it costs the fimm 50 every time orders and is a new shipment of stock. The firm is willing to face stockouts and the cost of such is per unit of tiverage stockout per month. The firm ampts to minvertory cous with the EOQ model What level of stockout we have rien just before new orders are received in the firm's warehouse rounded to the nearest unit) A 123 B 289 C 424 D540 E 707 Question Exeter ple decides to offer a 2.5% early settlement discount to clients. I expected that all of al clients will take up the offer and be incentivised to pay in one month instead of the two Enter pic pays afortunads tied up in the working capital. What would be the mostly impact of the 255 artement discount on the cash conversion cycle (COC) and the reported profit (RP)? A The length of CCC will increase the RP will increase 8 The length of CCC wil decrease the RP will not be affected C The length of CCC will increase the RP will decrease D The length of CCC will decrease the RP will decrease E The length of CCC will increase the RP will not be affected Questions Plymouth plc has in se nedorable preference shares nominal value Et each currently ading to 30 per share cu dividend Plymouth le pays corporation taxat a rate of 30% What the cost of these preference shares for the company to the nearest 0.1%? A 9.3% 8 10 N 13:35 D 15.4 E 172 CLOW