A geared and profitable company is evaluating the best method of financing the purchase of new machinery. It is considering either buying the machinery outright, financed by a secured bank borrowing and selling the machinery at the end of a fixed period of time or obtain the machinery under a lease for the same period of time.
Which is the correct discount rate to use when discounting the incremental cash flows of the lease against those of the buy and borrow alternative?

• A.The company's WACC.
• B.The company's cost of equity
• C.The pre-tax cost of the bank borrowing
• D.The post-tax cost of the bank borrowing

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

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A company is considering either directly exporting its product to customers in a foreign country or setting up a subsidiary in the foreign country to manufacture and supply customers in that country.
Details of each alternative method of supplying the foreign market are as follows:

There is an import tax on product entering the foreign country of 10% of sales value.
This import duty is a tax-allowable deduction in the company's domestic country.
The exchange rate is A$1.00 = B$1.10
Which alternative yields the highest total profit after taxation?

• A.Foreign subsidiary: A$38,500
• B.Domestic: A$33,750
• C.Foreign subsidiary: A$35,000
• D.Domestic: A$41,250

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Company Z wishes to borrow $50 million for 10 years at a fixed rate of interest.
Two alternative approaches are being considered: A. Issue a 10 year bond at a fixed rate of 6%, or B. Borrow from the bank at Libor +2.5% for a 10 year period and simultaneously enter into a 10 year interest rate swap.
Current 10 year swap rates against Libor are 4.0% - 4.2%.
What is the difference in the net interest cost between the two alternative approaches?

• A.Approach B is 2.0% a year less expensive
• B.Approach B is 2.2% a year less expensive
• C.Approach A is 0.5% a year less expensive
• D.Approach A is 0.7% a year less expensive

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The directors of a multinational group have decided to sell off a loss-making subsidiary and are considering the following methods of divestment:
1. Trade sale to an external buyer
2. A management buyout (MBC)
The MDO team and the external buyer have both offered the same price to the parent company for the subsidiary.
Which of the following is an advantage to the parent company of opting for a MBO compared to a trade sale as the preferred method of divestment?

• A.Raise the cash more quickly.
• B.Focus on the core competencies of the business
• C.Avoid a hostile reaction from key management.
• D.Retain the know edge of key management.

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