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Subject F3: Financial Strategy

22 C

1
TERP = [(N × cum rights price) + issue price]
N + 1

Therefore, assuming that the pre rights issue share price was P,

1
2.00 = [(3 × P) + (0.75 × P)]
4
So P= $2.13

23 B

Interest cover is PBIT/Interest cost

= $4.25 million/($10 million × 8%) = 5.31

A high level of interest cover is desirable, so this does not breach the covenant
of 5 times.

24 B

A positive covenant states what the company must do (e.g. achieve a target
profit margin) while a negative covenant states what the company must not do
(e.g. pay a dividend of more than a given amount).

25 B

To swap a variable rate for a fixed rate, the company will pay the higher of the
two quoted swap rates to the bank in exchange for LIBOR.

Therefore the net interest cost will be:

(LIBOR + 0.60%) + 5.60% – LIBOR = 6.20%

26 D

All the other answers relate to finance leases.

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