The table below shows the forecast for a company's next financial year:

The forecast incorporates the following assumptions:
* 25% of operating costs are variable
* Debt finance comprises a $400 million fixed rate loan at 5%
* Corporate income tax is paid at 25%
The company plans to do the following next year from the forecast earnings on the assumption that earnings will be equivalent to free cash flow:
* Pay a total dividend of $20 million
* Invest $40 million in new projects
What is the maximum % reduction in operating activity that could occur next year before the company's dividend and investment plans are affected?
Give your answer to the nearest 0.1%.

• A.4.8, 4.7, 4.9, 5.0, 4.6, 4.80, 4.70, 4.90, 5.00, 3.60%
• B.4.8, 4.7, 4.9, 5.0, 4.6, 4.80, 4.70, 4.90, 5.00, 4.60%

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Company X is based in Country A, whose currency is the A$.
It trades with customers in Country B, whose currency is the B$.
Company X aims to maintain its revenue from exports to Country B at 25% of total revenue.
Company A has the following forecast revenue:

The forecast revenue from Country B has assumed an exchange rate of A$1/B$2, that is A$1 = B$2.
If the B$ depreciates against the A$ by 10%, the ratio of revenue generated from Country B as a percentage of total revenue will:

• A.rise to 30.3%.
• B.rise to 27.0%.
• C.fall to 23.3%.
• D.fall to 22.7%.

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AA is considering changing its capital structure. The following information is currently relevant to AA:

The gearing rating raising the new debt finance will be 50%.
Which THREE of the following statement about the impact of AA's change in capital structure are true under Modigliani and Miler's capital structure theory with tax.

• A.The cost of equity will increase above 10%
• B.The cost of equity will decrease below 10%
• C.The WACC increase above 7.6
• D.The cost of debt will increase above 4%
• E.The WACC will decrease below 7.6%
• F.The cost of debt remain unchanged at 4%

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A company is currently all-equity financed with a cost of equity of 8%.
It plans to raise debt with a pre-tax cost of 4% in order to buy back equity shares.
After the buy-back, the debt-to-equity ratio at market values will be 1 to 2.
The corporate income tax rate is 30%.
Which of the following represents the company's cost of equity after the buy-back according to Modigliani and Miller's Theory of Capital Structure with taxes?

• A.9.8%
• B.13.6%
• C.8%
• D.9.4%

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Company J is in negotiations to acquire Company K and believes it can turn around Company K's performance to match its own.
The following information is available for the two companies:

Select the maximum price for each share that Company J should place on Company K during negotiations.

• A.$3.0
• B.$3.2
• C.$2.0
• D.$1.7

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