The value of a call option will increase because of:

• A.An increase in the time to expiry.
• B.A decrease in the market value of the share
• C.An increase in the strike price.
• D.A decrease in the volatility of the share.

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The Board of Directors of a small listed company engaged in exploration are currently considering the future dividend policy of the company. Exploration is considered a high-risk business and consequently the company has a low level of debt finance.
Forecasts indicate a period of profit fluctuation in the next few years as the company is planning to embark on a major capital investment project. Debt finance is unlikely to be available due to the project's high business risk.
Which THREE of the following are practical considerations when determining the company's dividend/retention policy?

• A.The timing and size of the cash flow requirements for the new investment.
• B.The fluctuating nature of the projected future profits.
• C.The legislation and regulation governing distributable profits.
• D.The dividend policies of mature listed multinational companies in the exploration industry.
• E.The general level of interest rates and the tax savings on interest costs relating to debt finance.

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On 1 January 20X1, a company had:
* Cost of equity of 10 0%.
* Cost of debt of 5.0%
* Debt of $100Mmilion
* 100 million $1 shares trading at $4.00 each.
On 1 February 20X1:
* The company's share police fell to $3.00.
* Debt and the cost of debt remained unchanged
The company does not pay tax.
Under Modigliani and Miller's theory without lax. what is the best estimate of the movement in the cost of equity as a result of the fall in ne share price?

• A.It will rise to 11.2%.
• B.It will stay the same at 10.0%.
• C.It will rise to 10.3%.
• D.It will fall to 9.3%.

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Which of the following best explains why the interest rate parity model is highly effective in practice?

• A.Governments actively manage their exchange rates so that parity holds
• B.Speculative forces drive the interest rates and exchange rates together to achieve parity.
• C.Any divergence from parity can be observed by the market and corrected by arbitrage
• D.Divergence from parity is impossible because exchange rates drive interest rates

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A company has just received a hostile bid. Which of the following response strategies could be considered?

• A.Poison pill strategy
• B.Approach a White Knight
• C.Revalue non-current assets
• D.Change the Articles of Association to amend voting rights

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