Two companies that operate in the same industry have different Price/Earnings (P/E) ratios as follows:

Which of the following is the most likely explanation of the different P/E ratios?

• A.Company B has a greater profit this year than Company A.
• B.Company B has higher business risk than Company A.
• C.Company B has higher gearing than Company A.
• D.Company B has higher expected future growth than Company A.

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A listed company in the retail sector has accumulated excess cash.
In recent years, it has experienced uncertainly with forecasting the required level of cash for capital expenditure due to unpredictable economic cycles.
Its excess cash is on deposit earning negligible returns.
The Board of Directors is considering the company's dividend policy, and the need to retain cash in the company.
Which THREE of the following are advantages of retaining excess cash in the company?

• A.Liquidity problems are less likely to be experienced if there is a downturn in business.
• B.The company will be in a position to respond promptly to unexpected investment opportunities.
• C.Retaining excess cash may make the company vulnerable to hostile takeover.
• D.The market may interpret the return of excess cash as a sign of weak growth prospects.
• E.The excess cash is earning a negligible return.

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A company has a covenant on its 5% long term corporate bond.
* Covenant - The earnings must not fall below $7 million
The bond has a nominal value of $60 million.
It is currently trading at 80% of its nominal value.
The projected earnings before interest and taxation for next year are $11.5 million.
The company retains 80% of its earnings. It pays tax at 20%.
Advise the Board of Directors which of the following covenant conditions will apply next year?

• A.The earnings will be = $11.50 million (The covenant will not be breached).
• B.The earnings will be = $7.28 million (The covenant will not be breached).
• C.The earnings will be = $5.44 million (The covenant will be breached).
• D.The earnings will be = $6.80 million (The covenant will be breached).

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Using the CAPM, the expected return for a company is 11%. The market return is 8% and the risk free rate is 2%.
What does the beta factor used in this calculation indicate about the risk of the company?

• A.It has greater risk than the average market risk.
• B.It is not possible to tell from CAPM.
• C.It has the same risk as the average market risk.
• D.It has lower risk than the average market risk.

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KKL is a listed sports clothing company with three separate business units. KKL is seeking to sell TT', one of these business units
TTP cwns a new. brand of trail running shoes that have Droved hugely popular with lone distance runners. The management team of TTP are frustrated by the constraints imposes b/ KKL in managing tie brand and developing. the bus ness and they believe that TTF has huge growth potential.
The management team of TTP have approached KKL with a proposal to purchase 1~P through a management layout (MDO). KKL has accepted this proposal as TTP has not proved to be a good fit' with the rest of the business and has agreed on the selling price.
Which THREE of the following factors a-e mast Likely to affect the success of the MBO?

• A.The ability of the TTF management team to take over the head office functions successfully.
• B.The motivation of the TTP management team to invest in future growth.
• C.The constraints imposed by KKL managing TTF's brand.
• D.The ability the TTP management team to develop the brand and achieve the expected growth.
• E.Searing sufficient. funding for the MBO.

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