On 31 October 20X3:
* A company expected to agree a foreign currency transaction in January 20X4 for settlement on 31 March
20X4.
* The company hedged the currency risk using a forward contract at nil cost for settlement on 31 March
20X4.
* The transaction was correctly treated as a cash flow hedge in accordance with IAS 39 Financial Instruments: Recognition and Measurement.
On 31 December 20X3, the financial year end, the fair value of the forward contract was $10,000 (asset).
How should the increase in the fair value of the forward contract be treated within the financial statements for the year ended 31 December 20X3?

• A.Not recognised in 20X3 as the gain will be offset by a loss on the hedged transaction.
• B.A $10,000 profit will be recognised within the Income Statement.
• C.Not recognised in 20X3 as the forward contract is not settled until after the year end.
• D.A $10,000 profit will be recognised within other comprehensive income.

Comment: *

Name: *

Email: *

Verification: *

A company's gearing (measured as debt/(debt + equity)) is currently 60% and it is investigating whether an optimal gearing structure exists within the industry.
It has analysed the capital structure of similar companies in the industry and it would appear that there is evidence supporting the traditional theory of capital structure.
Companies with the lowest WACC in the industry have gearing of around 45% to 50%.
Which of the following actions would result in the company achieving a more optimal capital structure?

• A.Undertaking a rights issue of equity to repay some of its debt.
• B.Using retained cash to undertake a buyback of some of its equity.
• C.Refinancing to replace some of its short term debt with long term debt.
• D.Increasing the level of dividend to return more cash to shareholders.

Comment: *

Name: *

Email: *

Verification: *

A company is deciding whether to offer a scrip dividend or a cash dividend to its shareholders.
Although the company has excellent long-term growth prospects, it is experiencing short-term profit and cash flow problems.
Which of the following statements is most likely to be a reason for choosing the scrip dividend?

• A.It is a way of encouraging shareholders to allow cash to be retained in the business.
• B.It is a way of increasing dividend per share.
• C.It is a way of raising additional finance to promote future growth.
• D.It is a way of increasing earnings per share.

Comment: *

Name: *

Email: *

Verification: *

A listed publishing company owns a subsidiary company whose business activity is training.
It wishes to dispose of the subsidiary company.
The following information is available:

The board of the publishing company believe that the value of the subsidiary company, and hence the value of the equity invested in it, can be determined by calculating the present value of the subsidiary's free cashflows.
Which of the following is the most appropriate discount rate to use when determining the enterprise value of the company?

• A.A WACC that reflects the gearing of the subsidiary company and the asset beta of a listed company that provides training activities.
• B.A WACC that the reflects the gearing of the publishing company and the equity beta factor of the publishing company.
• C.A WACC that reflects the gearing of the publishing company and the asset beta of a listed company that provides training activities.
• D.A cost of equity that reflects the asset beta of a listed company that provides training activities.

Comment: *

Name: *

Email: *

Verification: *

Company A has agreed to buy all the share capital of Company B.
The Board of Directors of Company A believes that the post-acquisition value of the expanded business can be computed using the "boot-strapping" concept.
Which of the following most accurately describes "boot-strapping" in this context?

• A.Forecasting the future free cash flows of the combined entities and discounting these at the bidder's Weighted Average Cost of Capital
• B.Combining the pre-acquisition market capitalisation of each company
• C.Adding together the current post-tax earnings of each company and multiplying this by the price/earnings ratio of the bidder
• D.Adding together the current post tax earnings of each company and multiplying this by the price earnings ratio of the acquired entity

Comment: *

Name: *

Email: *

Verification: *