Page 416 - F3 Integrated Workbook STUDENT 2019

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 B, C, D
Only in cross currency swaps are principals exchanged.

Both interest rate swaps and cross currency swaps can be used to reduce
interest payments.

Only cross currency swaps can be fixed for floating, fixed for fixed or floating for
floating. Interest rate swaps are always fixed for floating.

408