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A listed company in a high growth industry, where innovation is a key driver of success hasalways operated a residual dividend policy, resulting involatility in dividends due to periodic significant investments in research and development.
The company has recently come under pressure from some investors to change its dividend policy so that shareholders receive a consistent growing dividend. In addition, they suggested that the company should use more debt finance.
If the suggested change is made to the financial policies, which THREE of the following statements are true?
When valuing an unlisted company, aP/Eratio for a similar listed company may be used but adjustments to theP/Eratio may be necessary.
Which THREE of the following factors would justify a reduction in the proxy p/e ratio before use?
A company's current earnings before interest and taxation are $5 million.
These are expected to remain constant for the forseeable future.
The company has 10 million shares in issue which currently tradeat $3.60.
It also has a $10 million long term floating rate loan.
The current interest rate on this loan is 5%.
The company pays tax at 20%.
The company expects interest rates to increasenext yearto 6% andit's Price/Earnings (P/E) ratioto move to 9.5 times by the end of next year.
What percentagereduction in the share pricewill occurby the end of next year iftheinterest rate increaseand theP/Emovementboth occur?
A company based inCountry D, whose currency is the D$, has an objective of maintaining an operating profit margin of at least 10% each year.
Relevant data:
* The companymakes sales to Country E whose currency is the E$. It also makes sales to Country F whose currency is the F$.
* All purchases are from Country G whose currency is the G$.
* The settlement of all transactions is in the currency of the customer or supplier.
Whichof the following changes wouldbe most likely to help the company achieve its objective?
An analyst has valued a company using the free cash flow valuation model.
The analyst used the following data in determining the value:
* Estimated free cashflow in 1 year's time = $100,000
* Estimated growth in free cashflow after the first year = 5% each year indefinitely
* Appropriatecost of equity = 10%
Theresult produced by the analyst was as follows:
Value of equity = $100,000 (1+0.05)/0.10 = $1,050,000
The analyst made a number of errors in determining the value.
By how much has the analyst undervalued the company?
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