Certain workings and explanations: A company has a high return on capital employed but a low gross profit percentage.Which of the following is the best interpretation of these results?

A The company is profitable because it prices its sales aggressively.

B The company should increase its selling prices.

C The company is unprofitable despite a high return on capital employed.

D Gross profit is a very straightforward measure, so the company should

disregard the return on capital employed.

[2]

2 A company has a high price earnings (P/E) ratio. Which of the following is the most

likely explanation for this?

A The current share price is too high.

B The current share price is too low.

C If the directors could increase reported earnings then the share price would be

even higher.

D The stock market is confident in the company.

[2]

3 A company's board of directors is considering an approach by a competitor who

wishes to offer the shareholders an attractive price for their shares so that it can take

the business over. Which of the following responses is most compatible with agency

theory?

A The directors will probably recommend the acceptance of the offer because it

will maximise the shareholders' wealth.

B The directors will probably recommend the rejection of the offer because it

would threaten their job security.

C The directors will probably recommend the rejection of the offer because they

have no desire to maximise the wealth of a competitor's shareholders.

D The directors will probably recommend the acceptance of the offer because

the amount offered is greater than that set by market forces.

4. Explain why shareholders might be worried because a quoted company's diluted earnings per share is significantly lower than its basic earnings per share. [5]

5.a) Explain what is meant by the term "subsidiary company".

(b) Explain why a holding company is required to have set of consolidatedfinancial statements for its shareholders.

6.

The chief executive of Vest has suggested that it might be worth considering buying Rough as a going concern. It would cost approximately $8.5m to acquire and reorganise the company so that it could manufacture a new product range that would make heavy use of Vest's materials. This new line of business is expected to generate a net annual cash flow of 10.8m in perpetuity. Vest's cost of capital is 8%. Enquiries of the directors of Rough suggest that their cost of capital prior to the collapse was 1 1%. (i) Calculate the amount that Vest is likely to receive from Rough in the event that the company is wound up. [5] (ii) (a) Calculate the value of Rough to Vest, assuming required rates of return of 8% and 11% on the estimated future cash flows. (b) Comment on your findings in (a). [3] (iii) (a) Explain why the appropriate required rate of return for this investment is unlikely to be that of either Rough or Vest. (b) Explain how Vest should go about valuing the proposed investment in Rough.The latest balance sheet of Rough Lid is as follows: Rough Ltd Balance sheet as at 31 March 2008 fm fm ASSETS Non-current assets Intangible Property, plant and equipment 15 Current assets Inventory W N Trade receivables 5 Total assets 20 EQUITY AND LIABILITIES Share capital Retained earnings 6 10 Non-current liabilities Secured loans Current liabilities Trade payables - N Bank 3 20 Vest Lid supplies raw materials to Rough Lid. The finance director of Vest has just discovered that Rough has run into serious problems and is likely to be wound up. This is a matter of major concern because Rough owes Vest $500,000 which is included in the trade payables as at the latest balance sheet date. The finance director of Vest is trying to estimate how much, if anything, the company will receive once Rough has been wound up. The following information has been gathered from various sources: Intangible non-current assets comprise the cost of buying a licence to manufacture a product that has been the cause of Rough's downfall. The product has been linked to a major consumer safety scare. Property, plant and equipment has been offered for sale and is likely to realise f6m. Inventory and trade receivables are likely to realise 50% of their book values.A major quoted company has had a policy of reinvesting earnings and paying very little in the way of dividends for many years. The company now finds itself with a significant cash balance and very few attractive projects in which to invest. The directors are debating the merits of paying a substantial dividend. (i) Explain why the potential tax implications of receiving a dividend might make this proposal unpopular with this company's shareholders. [8] (ii) Explain why it might not be viable for the company to simply retain the funds and to wait until some attractive investment opportunities arose. [8] (iii) Explain why a quoted company might choose to release commercially sensitive information about investments and performance to the financial markets. [4]