A2: Strategic Financial Policy Part 1 (Untimed)

Companies Thando and Busi operate in the same industry. They have the same level of earnings but Company Busi has a higher P/E ratio.

Given this information, which of the following is/are true (select all that apply)?

Akin, the finance director for Moonlight PLC, is drafting a financial strategy which will lead to the maximisation of shareholder wealth.

Akin is currently trying to ascertain the optimal debt level for Moonlight PLC.

What type of decision is Akin making?

Paxton Ltd is looking to obtain a large loan in order to expand their operations.

Which of the following factors would increase a lender’s desire to lend to Paxton Ltd?

Select ALL that apply:

Select the THREE strategies below that are the most likely to enhance shareholder wealth.

Select ALL the reasons below that are the MOST likely to account for a company facing cash flow problems.

Joel Ltd is an all equity financed construction firm with equity valued at £5,000,000. The firm has budgeted the following results for 20X1:

Neo, the finance director for Joel Ltd, wants to introduce debt into the business and reduce equity such that the new capital structure would be 20% debt and 80% equity.

If the current interest rate is 5%, what impact will the proposed change in the capital structure of the business have on the current ROE for Joel Ltd?

The table below shows information regarding 2 potential acquisition targets, X and Y. Both of these potential acquisition targets are listed companies and operate in similar industries and have the same capital structure.

Given this information, choose the statement below that is a realistic conclusion that can be made about the two companies.

A lender is assessing the creditworthiness of a borrower. Of the following financial ratios, which is the LEAST likely to be of interest to the lender?

Olethu has $1.2 million in assets that are currently financed with 100% equity finance. Olethu’s earnings before interest and tax (EBIT) are $300,000 and its tax rate is 30%.

What will Olethu’s return on equity (ROE) be before and after the change, if the company changes its capital structure to include 40% debt? (Assume that the interest rate on debt is 5%).

Which FOUR of the following are key economic factors that affect financial strategy?

A financial manager, who is setting up a company’s financial strategy, will likely NOT be influenced by which of the following external factors? 

Select ALL that apply.

Lesego Inc. is currently in deep trouble, following an encouraging inception in the 70s. The company introduced a wide range of premier lava lamps which were the best in the market. With the current technology market constantly evolving, Lesego Inc. is struggling to keep up. Following continued unsuccessful attempts to maintain their high performance from the past glory days, they have accumulated a copious amount of debt. Lesego Inc. is looking for financial support, in a desperate attempt to innovate and improve. However, banks are not willing to provide financial support to them.

Which TWO reasons below would explain the banks’ unwillingness to offer financial support to Lesego Inc.?

Thin capitalisation rules aim to:

The directors of Ntado Corp., an unlisted company, have identified an attractive (positive NPV) project which is expected to generate positive cash flows for the company over a five-year period.

A new machine is necessary for the project, and financing would be needed to purchase the machine.

Given this information, which financing decision below would be the most appropriate for Ntado Corp. to consider?

Tesla Inc. is an American car manufacturer that purchases raw materials from suppliers across the world.

Which of the strategies below could Tesla Inc. use to reduce the firm’s exposure to transaction risk?

Select ALL that may apply:

Executive Transport Ltd has 5% convertible loan stock in issue. These convertible loan stocks are due to be either redeemed or converted into ordinary shares by the end of the current financial year.

If all the loan stock holders convert to equity shares, which statement below is correct?

Given that Vodacom has a current dividend yield of 6% and a dividend pay-out ratio of 15%, what is the company’s PE ratio?