41.7 convertible bond will not normally contain which ONE ofthe following features? ‘A Alow coupon rate B The obligation to convert into shares at the expiry ofthe bond. © Debt covenants. D The entitlement to redeem the bond at is par value 1.8 According to the creditor hierarchy, Investor): ist the following from high risk to low risk (from the viewpoint of the | Ordinary share capital WW Preference share capital IM Trade payables IV Bank loan with fixed and floating charges A LIM BIL WAIN Do WILE 1.9 Which ONE ofthe following is an advantage of an offer for sale compared toa placing? ‘A Lower issue costs B_Ahigher issue price © Speed. D_Nodilution of contrat 1.10. Rank the following from highest 3k to lowest risk from a company's perspective. | Preference shares Il Convertiole bonds IIL Redeemable bonds IV Ordinary shares A una 8 muy tun > Wain 2 Cost of capital 21 Complete the following sentences below by writing in the correct naraive from te list provided ‘The posta cost of debt for a convertible bond isthe ofthe relevant cash tows associted wth. The tlevant cash lows are te market value of now, the annual interest payments tax andthe higher of he redemption value ofthe Bond inte future or he anticipated share price i conversion occurs. Picklist for narratives Internal rate of return net present value the shares after betore the bond a sna22 Acompany has just paid an ordinary cividend of 20 cents per share; asa result the shares are trading at $5.30. I dividend growth is expected to be 4% per annum what is the company’s cost of equity to the nearest ‘whole number? A 6% Bo O% Cc 8% D 9% 23 MexTex Co has the following capital structure, $m 80 million ordinary shares of S0c 40 Reserves 240 11% bonds 30 310 ‘The bonds are irredeemable and are trading at their par value, The company's rate of tax is 40%, Mex Tex's cost of equity has been estimated at 18% per annum. The current market price per share is $1.00 ex diy ‘The company's weighted average cost of capita, for investment appraisal purposes, is? A 144% Be 14.9% c 17.0% D 16.3% 24 Company 8 has a 2% convertible bond that is redeemable in 5 years time ata premium of 10% to its par value of $100 or convertible into 20 shares. 8's share price is currently $4 and is expected to rise by 10% per year. The rate of corporate income taxis 25%. ‘Which TWO ofthe fotlowing are cash flows that wil be used to calculate the cost of B's convertible bonds? A 2x (10.25) B 100 co 1288 D110 25 Alpha Co has $250 million of 4% bonds in issue. This debt was orginally issued tits par value of $100 and Is now trading at 125% ofthis value. Alpha pays 25% tax. Calculate Alpha's post tax cost of debt: JX to one decimal place. 28 XCohasa policy of increasing its dividend ata rate of 10% per year. X Co's shares are currently trading at ‘$4.20 cum div, anda dividend payment of $0.20 is due tobe paid Using the divi fond growth model, the cost of equity for X Co is Xe (to one decimal place) BPP Cues27 The price of a company's share is currently $40 ex dv. The last dividend that has been paid is $3.00 per share the company's cost of equity is 10% pa, what is the implied constant annual dividend growth rate? A 239% B 250%. c 7.50%. D 10.00% 2.8 Extracts from the statement of financial position of Drum Co are as follows. $m 6% irredeemable bonds 800 Ordinary shares of 25 cents 100 Reserves 1,000 ‘The shares have a market value of $5 each and the cost of equity is 9%, The bonds have a market value of $105.0. Taxis 25%. ‘What isthe weighted average cost of capital of Drum Co? A 60% Bo 61% co 74% D 7.6% 29 Which TWO of the following are advantages of convert bonds compared witha bank loan? ‘A _Lower interest payments B Tax raliet on intrest payments © Thepossibitty of lower cash repayments atthe end ofthe term ofthe debt. D The billy ofthe company to conver the bonds into shares i interest repayments become a problem 240 FX has 6% irredeemable debentures in issue which are currently quoted at 90% of their nominal value of ‘$100. FX pays tax at a rate of 25%, ‘The posttax cost of debt ofthese irredeemable debentures is: A 4% B 45% Cc 67% D 5.0% = sna