Company Y plans to diversify into an activity where Company X has an equity beta of 1.6, a debt beta of zero and gearing of 50% (debt/debt plus equity).
The risk-free rate of return is 5% and the market portfolio is expected to return 10%.
The rate of corporate income tax is 30%.
What would be the risk-adjusted cost of equity if Company Y has 60% equity and 40% debt?

• A.11.9%
• B.9.1%
• C.11.6%
• D.13%

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Extracts from a company's profit forecast for the next financial year as follows:

Since preparing the forecast, the company has decided to return surplus cash to shareholders by a share repurchase arrangement.
The share repurchase would result in the company purchasing 20% of the 1,250 million ordinary shares currently in issue and canceling them.
Assuming the share repurchase went ahead, the impact on the company's forecast earnings per share will be an increase of:

• A.$0.200
• B.$0.125
• C.$0.100
• D.$0.175

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An unlisted company.
* Is owned by the original founders and members of their families
* Pays annual dividends each year depending on the cash requirements of the dominant shareholders.
* Has earnings that are highly sensitive to underlying economic conditions.
* Is a small business in a large Industry where there are listed companies with comparable capital structures
Which of the following methods is likely to give the most accurate equity value for this unlisted company?

• A.Discounted cash flow analysis at WACC (based on cash flows after tax but before financing) plus the market value of debt.
• B.P/E based valuation using the P/E of a similar company.
• C.Net asset valuation
• D.Dividend valuation model.

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A company gas a large cash balance but its directors have been unable to identify any positive NPV projects to invest in. Which THREE of the following are advantages of a share repurchase, compared with a one-off large dividend?

• A.The shareholder can choose whether to take the cast or not.
• B.It increases the number of shares issue.
• C.It means that the company will be able to pay lower total dividends in the future.
• D.It returns cash to shareholders so that they can choose hew to spend It
• E.It will not create an expectation for future increased dividends.

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An unlisted company is attempting to value its equity using the dividend valuation model.
Relevant information is as follows:
* A dividend of $500,000 has just been paid.
* Dividend growth of 8% is expected for the foreseeable future.
* Earnings growth of 6% is expected for the foreseeable future.
* The cost of equity of a proxy listed company is 15%.
* The risk premium required due to the company being unlisted is 3%.
The calculation that has been performed is as follows:
Equity value = $540,000 / (0.18 - 0.08) = $5,400,000
What is the fault with the calculation that has been performed?

• A.The cost of equity used in the calculation should have been 15%; no adjustment was necessary.
• B.The dividend growth rate is unsuitable given that earning growth is lower than dividend growth.
• C.The cost of equity used in the calculation should have been 12% (15% subtract 3%).
• D.The dividend cashflow used should have been $500,000 rather than $540,000.

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