TU has relatively few tangible assets and is dependent for profits and growth on the high-value individuals it employs. Which of the following statements best explains why the net asset valuator method's considered unstable for TU?

• A.TU accounts for its intangible assets at historical value.
• B.TU does not account for its tangible assets
• C.TU accounts for its intangible assets at net realisable value.
• D.TU does not account for its intangible assets.

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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.

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A is a listed company. Its shares trade on a stock market exhibiting semi-strong form efficiency.
Which of the following is most likely to increase the wealth of A's shareholders?

• A.Announcing that inventory will be impaired.
• B.Announcing that a project will be undertaken generating a positive net present value.
• C.Announcing that the final dividend will remain unchanged from the previous 3 years.
• D.Announcing that a non-current asset will be revalued in the statement of financial position.

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Company A has a cash surplus.
The discount rate used for a typical project is the company's weighted average cost of capital of 10%.
No investment projects will be available for at least 2 years.
Which of the following is currently most likely to increase shareholder wealth in respect of the surplus cash?

• A.Investing in a 2 year bond returning 5% each year.
• B.Investing in the local money market at 4% each year.
• C.Maintaining the cash in a current account.
• D.Paying the surplus cash as a dividend at the earliest opportunity.

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A listed company plans to raise $350 million to finance a major expansion programme.
The cash flow projections for the programme are subject to considerable variability.
Brief details of the programme have been public knowledge for a few weeks.
The directors are considering two financing options, either a rights issue at a 20% discount to current share price or a long term bond.
The following data is relevant:
The company's share price has fallen by 5% over the past 3 months compared with a fall in the market of 3% over the same period.
The directors favour the bond option.
However, the Chief Accountant has provided arguments for a rights issue.
Which TWO of the following arguments in favour of a right issue are correct?

• A.The recent fall in the share price makes a rights issue more attractive to the company.
• B.The WACC will decrease assuming Modigliani and Miller's Theory of Capital Structure without taxes applies.
• C.The administrative costs of a rights issue will be lower.
• D.The rights issue will lead to less pressure on the operating cash flows of the programme.
• E.The issue of bonds might limit the availability of debt finance in the future.

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