A product costs USD10 when purchased in the USA. The same product costs USD12 when it is purchased in the UK and the price in GBP is convened to USD.
Which of the following statement concerning purchasing power parity is correct?

• A.The exchange rate between the USD and GBP will change so that tie price differential on this product (and at other products) is eliminated.
• B.Economic forces will bring the prices in the USA and UK into line.
• C.Economic forces should eliminate the price difference. but there could be market imperfections that permit it to persist.
• D.This type of price deferential is a reliable baas for predicting currency movements

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A company's Board of Directors is considering raising a long-term bank loan incorporating a number of covenants.
The Board members are unsure what loan covenants involve.
Which THREE of the following statements regarding loan covenants are true?

• A.A financial covenant usually requires the company to adhere to specific financial conditions or targets.
• B.A covenant gives the financial institution the right but not the obligation to convert debt into equity in a case of non-compliance.
• C.A positive loan covenant would require the company to undertake specific actions.
• D.A restrictive covenant prohibits the company from conducting certain actions without the approval of the lending institution.
• E.A loan covenant has no contractually binding obligations.

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A large multi-divisional company in the food processing and distribution business is conducting a strategic review. The divisions all compete in the same market.
The sale of one of its underperforming food processing divisions to the divisional management team is currently being considered. The purchase by the divisional management team will require venture capital finance.
Which THREE of the following are likely to influence the multi-divisional company's decision on whether or not to sell the under-performing division to the management team?

• A.The quality of the management team and its ability to manage the divested division successfully.
• B.The specific conditions imposed on the management team by the venture capital provider.
• C.The divisional management team has detailed confidential information about the operation of the other divisions.
• D.The divisional management team has skills and experience that are important for the future successful operation of other divisions.
• E.The ability of the management team to raise the finance required to complete the purchase of the division at a reasonable price.

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A company has:
* A price/earnings (P/E) ratio of 10.
* Earnings of $10 million.
* A market equity value of $100 million.
The directors forecast that the company's P/E ratio will fall to 8 and earnings fall to $9 million.
Which of the following calculations gives the best estimate of new company equity value in $ million following such a change?

• A.
• B.
• C.
• D.

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AA is considering changing its capital structure. The following information is currently relevant to AA:

The gearing rating raising the new debt finance will be 50%.
Which THREE of the following statement about the impact of AA's change in capital structure are true under Modigliani and Miler's capital structure theory with tax.

• A.The cost of equity will decrease below 10%
• B.The cost of debt will increase above 4%
• C.The WACC will decrease below 7.6%
• D.The cost of equity will increase above 10%
• E.The cost of debt remain unchanged at 4%
• F.The WACC increase above 7.6

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