AFM Role of the senior financial adviser

Using CAPM, a risk free rate of 4 percent, a market return of 10 percent and an equity beta of 1.2 give a cost of equity of:

• 1 7.2%
• 2 12.0%
• 3 10.0%
• 4 11.2%

A company has equity of $600m with a cost of 12 percent and debt of $400m with a pre-tax cost of 6 percent. Tax is 25 percent. The WACC is:

• 1 7.5%
• 2 9.0%
• 3 9.6%
• 4 10.2%

An equity beta of 1.2 is observed in a firm with equity of $600m and debt of $400m (debt beta zero) and tax of 25 percent. The asset beta is:

• 1 1.2
• 2 0.9
• 3 0.6
• 4 0.8

In Modigliani and Miller's theory with corporate tax, the value of a geared company compared with an identical ungeared one is higher by:

• 1 The cost of equity
• 2 The dividend paid
• 3 The present value of the tax shield on debt
• 4 Nothing, as the value is the same

If a company with perpetual debt of $400m is subject to tax at 25 percent, the value of the tax shield in the M&M model with tax is:

• 1 $100m
• 2 $400m
• 3 $25m
• 4 $300m

The pecking order theory suggests that a company prefers to finance new investment first from:

• 1 New equity
• 2 Retained earnings
• 3 Convertible debt
• 4 Preference shares

A policy of paying a constant or steadily rising dividend, even when profit varies, is often chosen because it:

• 1 Maximises retained earnings
• 2 Signals confidence and reassures shareholders
• 3 Raises the cost of capital
• 4 Eliminates the need for investment