4 (a) A company may choose to finance its activities mainly by equity capital, with low borrowings (low gearing) or byrelying on high borrowings with relatively low equity capital (high gearing).Required:Explain why a highly geared company is generally mo

题目

4 (a) A company may choose to finance its activities mainly by equity capital, with low borrowings (low gearing) or by

relying on high borrowings with relatively low equity capital (high gearing).

Required:

Explain why a highly geared company is generally more risky from an investor’s point of view than a company

with low gearing. (3 marks)

相似考题

1.ENUM类型的字段level定义为(LOW、MIDDLE、HIGH),ORDERBYlevelasc的顺序是()A、HIGH、LOW、MIDDLEB、LOW、MIDDLE、HIGHC、MIDDLE、LOW、HIGHD、HIGH、MIDDLE、LOW

2.(b) Assuming that the cost of equity and cost of debt do not alter, estimate the effect of the share repurchase on the company’s cost of capital and value. (5 marks)

3.11 Which of the following statements are correct?1 A company might make a rights issue if it wished to raise more equity capital.2 A rights issue might increase the share premium account whereas a bonus issue is likely to reduce it.3 A bonus issue will reduce the gearing (leverage) ratio of a company.4 A rights issue will always increase the number of shareholders in a company whereas a bonus issue will not.A 1 and 2B 1 and 3C 2 and 3D 2 and 4

4.18 Which of the following statements about accounting ratios and their interpretation are correct?1 A low-geared company is more able to survive a downturn in profit than a highly-geared company.2 If a company has a high price earnings ratio, this will often indicate that the market expects its profits to rise.3 All companies should try to achieve a current ratio (current assets/current liabilities) of 2:1.A 2 and 3 onlyB 1 and 3 onlyC 1 and 2 onlyD All three statements are correct

更多“4 (a) A company may choose to finance its activities mainly by equity capital, with low borrowings (low gearing) or byrelying on high borrowings with relatively low equity capital (high gearing).Required:Explain why a highly geared company is generally mo”相关问题

  • 第1题：

    4 (a) Explain the meaning of the term ‘working capital cycle’ for a trading company. (4 marks)


    正确答案：
    (a) The working capital cycle illustrates the changing make-up of working capital in the course of the trading operations of a
    business:
    1 Purchases are made on credit and the goods go into inventory.
    2 Inventory is sold and converted into receivables
    3 Credit customers pay their accounts
    4 Cash is used to pay suppliers.

  • 第2题：

    3 Damian is the finance director of Linden Limited, a medium sized, unquoted, UK trading company, with a 31 July

    year end. Damian personally owns 10% of the ordinary issued share capital of Linden Limited, for which he paid

    ￡10,000 in June 1998. He estimates that the current market value of Linden Limited is ￡9 million and that the

    company will make taxable profits of ￡1·4 million in the forthcoming year to 31 July 2007.

    (a) Damian believes that Linden Limited should conduct its activities in a socially responsible manner and to this

    end has proposed that in future all cars purchased by the company should be low emission vehicles. The sales

    director has stated that several of his staff, who are the main recipients of company cars, other than the directors,

    are extremely unhappy with this proposal, perceiving it as downgrading their value and status.

    The cars currently provided to the sales staff have a list price of ￡19,600, on which Linden Limited receives a

    bulk purchase discount of 6% from the dealer, and a CO2 emission rate of 168 grams/kilometre. The company

    pays for up to ￡400 of accessories, of the salesmen’s own choice to be fitted to the cars and all of the running

    costs, including private petrol. The cars are replaced every three years and the ‘old’ cars are sold at auction,

    because they are high mileage vehicles.

    The low emission cars it is proposed to purchase will have the same list price as the current cars, but the dealer

    is only prepared to offer a bulk discount of 5% on these vehicles. Damian does not propose to make any other

    changes to Linden Limited’s company car policy or practice.

    Required:

    (i) Explain the tax consequences of the proposed move to low emission vehicles for both the individual

    salesmen and Linden Limited, illustrating your answer by means of relevant calculations of the tax and

    national insurance (NIC) savings arising. (9 marks)


    正确答案：
    (a) (i) Individual salesmen
    The taxable benefit is determined by the list price of the vehicle plus the cost of the accessories (￡20,000) and the CO2
    emission rate. The current vehicles have a CO2 emission rate of 168 grams/kilometre, so the benefit will be calculated
    at the rate of 20% ((168 – 140)/5 + 15), resulting in a total annual car and car fuel benefit charge of ￡6,880 (20,000
    x 20% + 14,400 x 20%). The low emission vehicles will be chargeable at the basic percentage rate of 15% resulting
    in a total annual car and fuel benefit charge of ￡5,160 (20,000 x 15% + 14,400 x 15%). The salesmen will thus
    make an annual income tax saving at their marginal rate of tax, i.e. ￡378 (1,720 x 22%) if they are basic rate taxpayers
    and ￡688 (1,720 x 40%) if they are higher rate taxpayers.
    Linden Limited
    The current vehicles will be classed as ‘expensive’ cars based on the discounted list price plus the cost of the accessories
    of ￡18,824 (19,600 x 94% + 400). The annual writing down allowances will thus be restricted to ￡3,000 throughout
    the period of ownership, but there will be no restriction of the balancing allowance available on disposal. The low
    emission vehicles will be eligible for a 100% first year allowance of ￡19,020 (19,600 x 95% + 400), but there will
    also be a balancing charge on disposal equivalent to the sales proceeds. Therefore, the total of the allowances available
    over the life of the cars will be effectively the same in both cases. As a single company with taxable profits of
    ￡1·4 million, Linden Limited will pay corporation tax at the small companies marginal rate of 32·75% in the year to
    31 July 2007, giving a tax benefit in that year of ￡5,247 for each low emission car purchased ((19,020 – 3,000) x
    32·75%).
    The company will also make an annual saving in terms of the Class 1A national insurance contributions payable on the
    salesmen’s benefits of ￡220 ((6,880 – 5,160) x 12·8%). But, as these Class 1A contributions are deductible for
    corporation tax, the net saving will only be ￡205 (220 x (100 – 32·75)%).
    As the VAT liability payable on the provision of private fuel is based on engine capacity (not the CO2 emission rate) this
    will not necessarily be affected.

  • 第3题：

    Term borrowings are used to finance the borrowers to purchase buildings and equipment needed, working capital and existing obligations.

    A．Right

    B．Wrong

    C．Doesn't say


    正确答案：B
    解析：结合整个文章第一段可以知道定期贷款(term borrowings)可以用来为购买所需要的设备、房产以及营运资金进行融资(finance)，但是第一段最后一句指出Term borrowing is also used to refinance existing obligations. refinance再融资，与融资含义不同。

  • 第4题：

    KFP Co, a company listed on a major stock market, is looking at its cost of capital as it prepares to make a bid to buy a rival unlisted company, NGN. Both companies are in the same business sector. Financial information on KFP Co and NGN is as follows:

    NGN has a cost of equity of 12% per year and has maintained a dividend payout ratio of 45% for several years. The current earnings per share of the company is 80c per share and its earnings have grown at an average rate of 4·5% per year in recent years.

    The ex div share price of KFP Co is $4·20 per share and it has an equity beta of 1·2. The 7% bonds of the company are trading on an ex interest basis at $94·74 per $100 bond. The price/earnings ratio of KFP Co is eight times.

    The directors of KFP Co believe a cash offer for the shares of NGN would have the best chance of success. It has been suggested that a cash offer could be financed by debt.

    Required:

    (a) Calculate the weighted average cost of capital of KFP Co on a market value weighted basis. (10 marks)

    (b) Calculate the total value of the target company, NGN, using the following valuation methods:

    (i) Price/earnings ratio method, using the price/earnings ratio of KFP Co; and

    (ii) Dividend growth model. (6 marks)

    (c) Discuss the relationship between capital structure and weighted average cost of capital, and comment on

    the suggestion that debt could be used to finance a cash offer for NGN. (9 marks)


    正确答案：
    (b)(i)Price/earningsratiomethodEarningspershareofNGN=80cpersharePrice/earningsratioofKFPCo=8SharepriceofNGN=80x8=640cor$6·40NumberofordinarysharesofNGN=5/0·5=10millionsharesValueofNGN=6·40x10m=$64millionHowever,itcanbearguedthatareductionintheappliedprice/earningsratioisneededasNGNisunlistedandthereforeitssharesaremoredifficulttobuyandsellthanthoseofalistedcompanysuchasKFPCo.Ifwereducetheappliedprice/earningsratioby10%(othersimilarpercentagereductionswouldbeacceptable),itbecomes7·2timesandthevalueofNGNwouldbe(80/100)x7·2x10m=$57·6million(ii)DividendgrowthmodelDividendpershareofNGN=80cx0·45=36cpershareSincethepayoutratiohasbeenmaintainedforseveralyears,recentearningsgrowthisthesameasrecentdividendgrowth,i.e.4·5%.Assumingthatthisdividendgrowthcontinuesinthefuture,thefuturedividendgrowthratewillbe4·5%.Sharepricefromdividendgrowthmodel=(36x1·045)/(0·12–0·045)=502cor$5·02ValueofNGN=5·02x10m=$50·2million(c)Adiscussionofcapitalstructurecouldstartfromrecognisingthatequityismoreexpensivethandebtbecauseoftherelativeriskofthetwosourcesoffinance.Equityisriskierthandebtandsoequityismoreexpensivethandebt.Thisdoesnotdependonthetaxefficiencyofdebt,sincewecanassumethatnotaxesexist.Wecanalsoassumethatasacompanygearsup,itreplacesequitywithdebt.Thismeansthatthecompany’scapitalbaseremainsconstantanditsweightedaveragecostofcapital(WACC)isnotaffectedbyincreasinginvestment.Thetraditionalviewofcapitalstructureassumesanon-linearrelationshipbetweenthecostofequityandfinancialrisk.Asacompanygearsup,thereisinitiallyverylittleincreaseinthecostofequityandtheWACCdecreasesbecausethecostofdebtislessthanthecostofequity.Apointisreached,however,wherethecostofequityrisesataratethatexceedsthereductioneffectofcheaperdebtandtheWACCstartstoincrease.Inthetraditionalview,therefore,aminimumWACCexistsand,asaresult,amaximumvalueofthecompanyarises.ModiglianiandMillerassumedaperfectcapitalmarketandalinearrelationshipbetweenthecostofequityandfinancialrisk.Theyarguedthat,asacompanygearedup,thecostofequityincreasedataratethatexactlycancelledoutthereductioneffectofcheaperdebt.WACCwasthereforeconstantatalllevelsofgearingandnooptimalcapitalstructure,wherethevalueofthecompanywasatamaximum,couldbefound.Itwasarguedthattheno-taxassumptionmadebyModiglianiandMillerwasunrealistic,sinceintherealworldinterestpaymentswereanallowableexpenseincalculatingtaxableprofitandsotheeffectivecostofdebtwasreducedbyitstaxefficiency.Theyrevisedtheirmodeltoincludethistaxeffectandshowedthat,asaresult,theWACCdecreasedinalinearfashionasacompanygearedup.Thevalueofthecompanyincreasedbythevalueofthe‘taxshield’andanoptimalcapitalstructurewouldresultbygearingupasmuchaspossible.Itwaspointedoutthatmarketimperfectionsassociatedwithhighlevelsofgearing,suchasbankruptcyriskandagencycosts,wouldlimittheextenttowhichacompanycouldgearup.Inpractice,therefore,itappearsthatcompaniescanreducetheirWACCbyincreasinggearing,whileavoidingthefinancialdistressthatcanariseathighlevelsofgearing.Ithasfurtherbeensuggestedthatcompanieschoosethesourceoffinancewhich,foronereasonoranother,iseasiestforthemtoaccess(peckingordertheory).Thisresultsinaninitialpreferenceforretainedearnings,followedbyapreferencefordebtbeforeturningtoequity.TheviewsuggeststhatcompaniesmaynotinpracticeseektominimisetheirWACC(andconsequentlymaximisecompanyvalueandshareholderwealth).TurningtothesuggestionthatdebtcouldbeusedtofinanceacashbidforNGN,thecurrentandpostacquisitioncapitalstructuresandtheirrelativegearinglevelsshouldbeconsidered,aswellastheamountofdebtfinancethatwouldbeneeded.Earliercalculationssuggestthatatleast$58mwouldbeneeded,ignoringanypremiumpaidtopersuadetargetcompanyshareholderstoselltheirshares.Thecurrentdebt/equityratioofKFPCois60%(15m/25m).Thedebtofthecompanywouldincreaseby$58minordertofinancethebidandbyafurther$20maftertheacquisition,duetotakingontheexistingdebtofNGN,givingatotalof$93m.Ignoringotherfactors,thegearingwouldincreaseto372%(93m/25m).KFPCowouldneedtoconsiderhowitcouldservicethisdangerouslyhighlevelofgearinganddealwiththesignificantriskofbankruptcythatitmightcreate.ItwouldalsoneedtoconsiderwhetherthebenefitsarisingfromtheacquisitionofNGNwouldcompensateforthesignificantincreaseinfinancialriskandbankruptcyriskresultingfromusingdebtfinance.

  • 第5题：

    In restricted visibility the speed of a vessel without operational radar may be ________ enable effective avoiding action to be taken on sighting another ship．

    A.too low to

    B.too high to

    C.too high for

    D.too low for


    正确答案：A

  • 第6题：

    数据结构与算法里，折半查找中，low指向低端的记录，high指向高端的记录，每次计算中间位置mid的公式是（）。

    • A、（low&high）/2
    • B、（low+high）/2
    • C、（low-high）/2
    • D、low/2+high/2

    正确答案:B

  • 第7题：

    Which two scenarios would benefit the most from TCP Acceleration? （）(Choose two.)

    • A、low-latency networks
    • B、high-latency networks
    • C、long-haul, low-bandwidth links
    • D、long-haul, high-bandwidth links

    正确答案:B,D

  • 第8题：

    单选题
    Operational amplifiers, used primarily in analog circuits, are characterized by（）
    A

    high input impedance, high gain and low output impedance

    B

    high input impedance, high gain and high output impedance

    C

    low input impedance, low gain and high output impedance

    D

    low input impedance, high gain and low output impedance


    正确答案： C
    解析： 暂无解析

  • 第9题：

    单选题
    In restricted visibility the speed of a vessel without operational radar may be（）enable effective avoiding action to be taken on sighting another ship.
    A

    too low to

    B

    too high to

    C

    too high for

    D

    too low for


    正确答案： A
    解析： 暂无解析

  • 第10题：

    问答题
    Do you think it is wise for a company to set a low price to attract customers? Why or why not?

    正确答案：
    Yes, lower price generally transfers into stronger demands. Of course, the cost should be taken into consideration firstly.﹨No, reducing the price is usually done at the cost of the quality, so it’s not good for the company in the long run.
    解析： 暂无解析

  • 第11题：

    单选题
    Two well-developed high pressure areas may be separated by a（）.
    A

    Hill of low pressure

    B

    Trough of low pressure

    C

    Valley of low pressure

    D

    Ridge of low pressure


    正确答案： A
    解析： 暂无解析

  • 第12题：

    单选题
    The direction of the surface wind is（）.
    A

    directly from high pressure toward low pressure

    B

    directly from low pressure toward high pressure

    C

    from high pressure toward low pressure deflected by the earth's rotation

    D

    from low pressure toward high pressure deflected by the earth's rotation


    正确答案： C
    解析： 暂无解析

  • 第13题：

    (ii) Explain why the disclosure of voluntary information in annual reports can enhance the company’s

    accountability to equity investors. (4 marks)


    正确答案：
    (ii) Accountability to equity investors
    Voluntary disclosures are an effective way of redressing the information asymmetry that exists between management and
    investors. In adding to mandatory content, voluntary disclosures give a fuller picture of the state of the company.
    More information helps investors decide whether the company matches their risk, strategic and ethical criteria, and
    expectations.
    Makes the annual report more forward looking (predictive) whereas the majority of the numerical content is backward
    facing on what has been.
    Helps transparency in communicating more fully thereby better meeting the agency accountability to investors,
    particularly shareholders.
    There is a considerable amount of qualitative information that cannot be conveyed using statutory numbers (such as
    strategy, ethical content, social reporting, etc).
    Voluntary disclosure gives a more rounded and more complete view of the company, its activities, strategies, purposes
    and values.
    Voluntary disclosure enables the company to address specific shareholder concerns as they arise (such as responding
    to negative publicity).
    [Tutorial note: other valid points will attract marks]

  • 第14题：

    (ii) State the taxation implications of both equity and loan finance from the point of view of a company.

    (3 marks)


    正确答案：
    (ii) A company needs to be aware of the following issues:
    Equity
    (1) Costs incurred in issuing share capital are not allowed as a trading deduction.
    (2) Distributions to investors are not allowed as a trading deduction.
    (3) The cost of making distributions to shareholders are disallowable.
    (4) Where profits are taxed at an effective rate of less than 19%, any profits used to make a distribution to noncorporate
    shareholders will themselves be taxed at the full 19% rate.
    Loan finance/debt
    (1) The incidental costs of obtaining/raising loan finance are broadly deductible as a trading expense.
    (2) Capital costs of raising loan finance (for example, loans issued at a discount) are not deductible for tax purposes.
    (3) Interest incurred on a loan to finance a business is deductible from trading income.

  • 第15题：

    The desirable properties of a marine fuel oil should include .

    A.high flash point and high viscosity

    B.low flash point and high viscosity

    C.low heating value and high sulphur content

    D.high heating value and low sulphur content


    正确答案：D

  • 第16题：

    Wal-Mart has been criticized by some groups for its .（ ）

    [A] low service quality

    [B] employees' low salary

    [C] high pressure on the other companies

    [D] discrimination against women


    正确答案：D

  • 第17题：

    In restricted visibility the safe speed of a vessel without operational radar may be ________ enable effective avoiding action to be taken on sighting another ship．

    A.too low to

    B.too high to

    C.too high for

    D.too low for


    正确答案：A

  • 第18题：

    数字口可以输出（），可以输入（）。

    • A、0（LOW）或1（HIGH）；0-1023
    • B、0（LOW）或1（HIGH）；0.1023
    • C、0（LOW）或1（HIGH）；0或1
    • D、0（LOW）或1（HIGH）；0

    正确答案:C

  • 第19题：

    Pipelines are not （）

    • A、labor-intensive 
    • B、capital-intensive 
    • C、tech-intensive 
    • D、low cost and high return

    正确答案:A

  • 第20题：

    单选题
    A tropical cyclone has recurved and entered temperate latitudes. In the Northern Hemisphere when a large high pressure system lies north of the storm，what situation may occur?（）
    A

    The low may suddenly deepen，and the cyclone intensify and pick up speed

    B

    The left semicircle may become the dangerous semicircle

    C

    The low and the high may merge and cancel out the weather characteristics of each

    D

    The high may force the cyclone to reverse its track


    正确答案： C
    解析： 暂无解析

  • 第21题：

    单选题
    A company’s efforts to keep expenses low and profits high may result in _____.
    A

    reduction in the number of employees

    B

    improvement of working conditions

    C

    fewer disputes between labor and management

    D

    a rise in workers’ wages


    正确答案： A
    解析：
    细节推断题。文章末句说公司裁员追求低支出、高利润。A项与原文相符。

  • 第22题：

    单选题
    Compared to a low pressure system，generally the air in a high is（）.
    A

    warmer，less dense，and less stable

    B

    cool，more dense，and drier

    C

    muggy and cloudy

    D

    extremely moist with high relative humidity


    正确答案： B
    解析： 暂无解析

  • 第23题：

    单选题
    A tide is called diurnal when（）.
    A

    only one high and one low water occur during a lunar day

    B

    the high tide is higher and the low tide is lower than usual

    C

    the high tide and low tide are exactly six hours apart

    D

    two high tides occur during a lunar day


    正确答案： A
    解析： 暂无解析

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