FIN Finance Questions and Answers

Supper plc has issued loan stock of $100 nominal value with annual interest of 10% per year, based on the nominal value. The loan stock has two years remaining before it is redeemed at par. Interest is paid annually and the most recent interest payment has just been paid. Investors currently require a yield of 8% per year on the loan stock.

What is the market value of the loan stock per $100 nominal value?

A public listed company has recently declared a dividend of $0.20 per share and maintains a constant dividend payout ratio of 40%. The market value of each share is $4.60 cum div and the nominal value of each share is $4.00.

The company pays 20% tax on its profits.

What is the price earnings ratio (ex div) of the company?

Which ONE of the following statements concerning the issue of shares is correct?

An analysis of the financial statements of a business reveals the following financial ratios:

1. A higher than average inventory holding period

2. A higher than average payment period for trade payables

3. A lower than average current ratio

4. A lower than average sales to working capital ratio

Which TWO of the above is consistent with a business being over-capitalized?

A UK based company is due to receive US$6,000,000 in three months from its American customer. It wants to hedge this receipt and has found an appropriate futures market based in the USA, where the value of one futures contract is £62,500. The current futures price is US$1.7778 per UK sterling.

How many contracts would the company buy or sell in order to hedge the exposure?

Aurora plc is considering an investment in a new process. The new process will require an increase in stocks of $30,000 during the first year. There will also be an increase in debtors outstanding of $40,000 and an increase of creditors outstanding of $35,000 during the first year. The new process will use machinery that was purchased immediately before the first year of operations at a cost of $300,000. The machinery is depreciated using the straight-line method and has an estimated life of five years and no residual value. During the first year, the net operating profit before depreciation from the new process is expected to be $180,000. The business uses the net present value method when evaluating investment proposals.

When undertaking the net present value calculations, what would be the estimated net cash flow during the first year of the project? (Ignore taxation)

Aludra Co has $450 million loan notes in issue that pay an annual fixed rate of interest of 6.3%. The directors of the company have recently decided to change this fixed rate for a floating rate of interest. A bank has offered a swap agreement whereby the bank pays a fixed rate of interest of 5.8% and receives LIBOR in return.

Assuming LIBOR is 5.4% for the first year of the swap agreement, what will be the percentage borrowing cost for Aludra Co?

Dorsal Co intends to make a bonus issue of ordinary shares during the forthcoming year.

Which one of the following will be affected as a result of the issue?

Kubilai Co, a listed company, is considering issuing additional equity capital. To ensure that all the new equity shares are sold, Kubilai Co wants to gain assurance that any shares not bought by the general public will be subscribed.

What term correctly describes a firm which agrees to subscribe for the equity shares which are not taken up?