P4: PROGRESS TEST 3
Progress Test 3 A
Multiple choice questions (9 questions approximate time 40 minutes)
1
Estimates for inflation for the next three years are given below: 20X7 20X8 20X9
UK 3% 2% 2%
Europe 2% 2.5% 3.5%
The current spot rate is 1.5 to the £. Using purchasing power parity theory, what is the forecast /£ exchange rate for 20X9? A B C D 2
1.507 /£ 1.514 /£ 1.485 /£ 1.450 /£
(2 marks)
Estimates for inflation for the next three years are given below: 20X7 20X8 20X9
UK 3% 2% 2%
USA 4% 5% 3.5%
The current spot rate is 0.5 £ to the $. Using purchasing power parity theory, what is the forecast £/$ exchange rate for 20X9? A B C D
0.527 £/$ 0.535 £/$ 0.474 £/$ 0.643 £/$
(2 marks)
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P4: PROGRESS TEST 3
Data for questions 34 A supermarket is evaluating an investment project overseas in Switzerland. The project will cost an initial 5 million Swiss Francs (SFr) and it is expected to earn nominal post-tax cash flows as follows. Year 1 2 3 4 Cash flow (SFr'000) 1,500 1,900 2,500 2,700 (a) The expected inflation rate in Switzerland is 3% a year, and 5% in the UK. (b) The current spot rate is 2 SFr per £1 sterling. (c) The company requires a nominal sterling return from this project of 16%. 3
4
Using the data above, and using purchasing power parity theory to forecast the exchange rates, the NPV in £'000s is: A 6319 B 2034 C 1039 D 546 (4 marks) Using the data above, what would be the SFr cost of capital that could be used to assess the project in SFr (and then converting the SFr NPV into £ at the spot rate): A 13.8% B 14.0% C 18.0% D 18.3% (2 marks)
Data for questions 57 The directors of Astra plc are considering the acquisition of Naught Ltd, a much smaller company making annual profits before tax of £400,000 (constant). The current rate of tax is 28%. Naught Ltds financial statements include the following information: £ £ Non-current assets (net book value) 1,600,000 Inventory 1,008,000 Receivables (less provision of 1% for doubtful debts) 792,000 Bank balances 40,000 1,840,000 Bank overdraft 100,000 Trade payables 980,000 (1,080,000) 2,360,000 Share capital and reserves 2,360,000 The estimated values of Naught Ltds assets are as follows. Replacement Cost £ Fixed assets 1,700,000 Stocks and WIP 1,080,000
Net realisable value £ 1,200,000 1,160,000
It is generally agreed that 2% of total debtors will be uncollectable. Astra has a P/E ratio of 15. Naughts cost of equity is 10%, and it pays out 90% of its earnings as a dividend.
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P4: PROGRESS TEST 3
5
What is minimum bid that Astra plc should make for Naught Ltd? A B C D
6
£6,000,000 £4,320,000 £1,680,000 £2,104,000
(2 marks)
Naught Ltd, using the dividend valuation model, is worth: A B C D
8
(2 marks)
If Astra plc and Naught Ltd are in the same industry, what is the maximum price that Astra should pay for Naught? A B C D
7
£2,096,160 £2,064,000 £2,104,000 £3,164,000
£3,600,000 £2,880,000 £2,592,000 £2,104,000
(2 marks)
Chancer plc is considering the acquisition of Risky plc. Risky plc is estimated to have free cash flows of £1,200,000 in the next year, growing at a rate of 4% p.a. for the foreseeable future. Risky has debt with a book value of £10m and a market value of £12m. Chancer has a weighted average cost of capital of 10% and a cost of equity of 12%. What is the value of Risky using the cash flow basis? A B C D
9
£10m £20m £8m £15m
(2 marks)
Grace plc is considering the acquisition of Drama plc. Drama plc is estimated to have free cash flows to equity of £1,500,000 in the next year, growing at a rate of 2% p.a. for the foreseeable future. Drama plc has debt with a book value of £10m and a market value of £12m. Grace has a weighted average cost of capital of 10% and a cost of equity of 12%. What is the value of Drama plc using the cash flow basis? A B C D
£15m £18.75m £5m £3m
(2 marks)
19
P4: PROGRESS TEST 3
B
Short written questions (2 questions approximate time 15 minutes)
1
Identify three types of synergy that can result from an acquisition, and give an example of each. (6 marks)
2
Identify four of the requirements of the City Code, and the purpose of each requirement. (4 marks)
END OF PROGRESS TEST
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