A2: Strategic Financial Policy Part 2 (Timed)

Jacob Ltd is a Germany food manufacturer looking to expand into the USA. In order to finance their expansion, the finance director has come up with the following strategy:

• At the beginning of the financial year, Jacob Ltd will receive a €2,000,000 loan at EURIBOR + 1% from Munich Global Bank in Germany.
• Jacob Ltd will then exchange this €2,000,000 loan at EURIBOR + 1% for $2,500,000 at a fixed rate of 5%, with Foster PLC, an American firm looking to obtain euro financing.
• In 3 years, both firms will exchange these principle amounts at a pre-agreed rate, closing out the transaction

 What is the name given to this type of transaction?

Lesedi PLC is a large multinational organisation based in the Netherlands, the firm has a subsidiary in Germany called Trading Ltd.

In 20X1, Lesedi earned group profits of €25m, the corporation tax due on these profits is €4.75m. In the same year, Trading earned profits of €2m. Lesedi’s corporation tax payable is €0.3m.

When Lesedi remits the profits of Trading, it can claim tax relief of €0.3m against the €4.75m due in corporation tax.

What is the term used to describe this situation?

Select all the strategies below that are the MOST likely to ease cash flow problems within a company.

The table below shows data for Alexandra World.

Given this information, which of the following statements is correct?

(i) Alexandra World has more debt in 20X2 compared to 20X1
(ii) Alexandra World has less debt in 20X2 compared to 20X1
(iii) Alexandra World has lower financial risk in 20X2
(iv) Alexandra World has higher financial risk in 20X2

Bokamoso Ltd is a manufacturer of alcoholic beverages in the fictional country of Botswana. The firm is drafting its financial strategy for the next 3 years.

The government of Botswana is concerned about organisations such as Bokamoso using intra-group borrowing to claim large amounts of tax relief on interest payments.

The government feels that they currently do not have sufficient legislation in place to prevent this from occurring. The only relevant law in place in Botswana is that large organisations such as Bokamoso must maintain a maximum debt to equity ratio of 1:2.

Which of the following statements is TRUE?

The volatility of interest rates in the economy is one of the major factors influencing the course of setting up a company’s financial strategy.

Which statement below has the greatest likelihood of increasing the interest rates in the economy?

Several managers from Ntombi Co. are working together to try to identify the optimum amount of cash to hold.

Fill in the sentences below by “typing” either TOO MUCH or TOO LITTLE to complete them.

Redbird Inc. has 1 million shares in issue. The shares have a nominal value of $1 and are currently trading at $4.00. Redbird Inc.’s P/E ratio is 14.10. The directors are considering raising $400,000 in order to undertake a new project. It is expected that the new project will cause earnings to rise by $30,000 each year.

What is the expected earnings per share (EPS) of Redbird Inc. after the finance has been raised and the project has been undertaken, if the company uses a 1 for 4 rights issue to raise the finance?

The table below reflects some financial information for the recent year for Khumalo Boutique:

Given this information, Khumalo Boutique has an asset turnover ratio of:

Which of the following statements is/are TRUE: 

Select ALL that apply.

Ronald Inc. is a listed company. It has 1 million $1 shares in issue, trading at $3.01, and 20,000, 5% coupon bonds with par value $100 and market value $95. Ronald Inc. made an operating profit of $2.66 million last year. The directors are considering issuing 10,000 new secured bonds at their par value of $100. The coupon rate would be 4%.

If operating profits stay constant, the interest cover of Ronald Inc. in the year after the bonds are issued will be:

Which of the following statements regarding the price-earnings (P/E) ratio is/are TRUE?

Select ALL that apply:

Summer Ltd is riddled with bad news. After furnishing the banks with their financial records for the last 40 years, they are promptly referred to a regulator. The regulator alleges that Summer Ltd has avoided tax from around 20 years ago until last year, just prior to the new CEO taking over the reins of the company. The red flag seems to be a very expensive pricing policy for certain parts to the R&D wing of their business, which is also registered as a business by itself.

According to this information, which of the following potential illegal practices has the regulator identified with Summer Ltd?

Shareholder wealth is MOST likely to be increased by which of the following?

Select the TWO most appropriate answers.

Drag and drop the correct risk after each of the following descriptions:

Below is a table of Apex Co.’s extract of financial statements for period ending 31st December 20X5 (with comparatives):

 What are THREE valid reasons for the changes to the capital structure during the year ending 20X5?

Complete the phrase below by dragging and dropping the correct answer into the blank space:

A foreign investor is considering the purchase of two bonds. Bond Y is an 8% coupon tax-exempt bond that yields 7.2%, while Bond Z is a 10% coupon bond that is taxable and yields 9%. If the two bonds are alike in all other characteristics, the marginal tax rate that would make the investor indifferent between the bonds is approximately……….

BasaliTech produces high tech devices and gadgets for entertainment. Their crucial supplies come from Country Z, which is situated 3,000 miles away. The current cost of importing these to their headquarters is substantial. Considering the fact that a new customs union is being setup in a nearby country (involving many others), offering lower tariffs to all global exporters, Donald, the manager of BasaliTech, is considering an international expansion.

Which of these tactical motives has caught Donald’s attention and made him consider an international expansion?