Mock 03

Question 1
Entity A is a publicly listed healthcare provider and operates a number of private hospitals in
Country X.
Entity B is a state-controlled owned healthcare provider with a substantial proportion of its funding
provided by the government of Country X.
Which of the following statements concerning the objectives of the two entities are correct?
1. The primary objectives of Entity A will be easier to define
2. The managers of Entity B are likely to have very little input or choice over its objectives
3. Entity A is more likely to have objectives which relate to a level of service
4. Entity B will have to demonstrate value for money

A. (1), (2) and (4)

B. (1) and (3)
C. (2), (3) and (4)
D. (1), (2) and (3)

Question 2
Which of the International Integrated Reporting Council's (IIRC) guiding principles does the
statement below describe?
'An integrated report should disclose information about matters that substantively affect the
organisation’s ability to create value over the short, medium and long term.’
A. Materiality
B. Strategic focus and future orientation
C. Consistency and comparability
D. Connectivity of information

Question 3
In which of the following situations is a residual dividend policy most likely to be appropriate?
A. A large publicly listed company
B. A small family-owned private company where the majority of the shareholders use
dividend income to pay household expenses
C. A small company listed on a small company stock exchange and owned by investors
seeking maximum capital growth on their investment
D. In a tax regime where individuals pay less tax on income than on capital gains
Question 4
Xpat Co is an established medium sized travel agency that operates in a region of Country Y.
Xpat is concerned with its dependence on bank finance because it is aware that banks are currently
cutting back on their commercial loan portfolios, so future bank loans may be slow to obtain and
expensive - if they are available at all.
Xpat is looking to raise new debt finance for a five year period to expand into new regions within
Country Y.
Which one of the following sources of finance are most likely to be suitable?
A. Convertible bond
B. Leasing
C. Private placement of bonds
D. Retained earnings

Question 5
50 million ordinary shares are to be offered to the general public by tender offer. Interested parties
were invited to bid for shares in the range $2.20 to $2.60 per share. The results are as follows:
Price Number of share
$ received at that
offered
2.20 bids
5
2.30 price
35
2.40 55
2.50 44
2.60 25

Which of the following options shows how the shares will be allocated?
Select from Column A, B, C or D.
Price Number of shares issued at each price (millions)
A B C D
$2.20 5 0 0 0
$2.30 35 0 0 0
$2.40 10 50 0 0
$2.50 0 0 50 25
$2.60 0 0 0 25

A. Column
B. Column
A
C. Column
D. B
Column
C
D
Question 6
The suggestion that the cost of equity of a company will increase as an ungeared company
introduces debt into its capital structure for the first time but the weighted average cost of capital
falls as a result of that increase in gearing comes from which of the following?
Select all that apply.
A. Modigliani and Miller's theory of gearing (without tax 1958)
B. Modigliani and Miller's theory of gearing (with tax 1963)
C. The Traditional theory of gearing
D. Arbitrage
E. Trade off theory

Question 7
Match the following scenarios with the types of acquisition given below.
A firm of estate agents acquiring a local construction company
An undertaker acquiring another undertaker in a different part of the same country
A supermarket acquiring a farm

 Conglomerate
 Horizontal
 Backward vertical
Question 8
The following figures are taken from the income statement of Company G for the year ended 30
September 20X4.
$m
Profit before tax 45
Depreciation 5
Dividend to ordinary shareholders 1
Net Interest 4
Tax 12

In addition G spent $20 million on tangible assets to replace existing obsolete assets. G's working
capital increased by $3 million during the year ended 30 September 20X4.
Calculate Company G's free cash flow for the year ended 30 September 20X4.
$ ________________ million
Question 9
$ Million
Operating profit 400
Depreciation and amortization 140
Finance charges paid 30
Capital expenditure to sustain operations 180
Tax paid 90
Repayment of borrowings 100
Equity dividend paid 60

The best estimate of free cash flow for equity is:

A. $80 million
B. $140 million
C. $180 million
D. $240 million
Question 10
XX's growth is underpinned by an aggressive acquisition strategy. Many of XX's acquisitions are
financed by cash bids.
XX operates in a volatile industry which is subject to frequent fluctuations in line with the
economic cycle although there are little if any seasonal variations.
Which TWO of the following are most likely to be motives for XX to hold surplus cash?
A. Speculative.
B. Transaction.
C. Economies of scale.
D. Precautionary.

Question 11
Musstrye Ardour Co is a small public company with 10,000,000 5c ordinary shares in issue.
Its results for the year just ended are as follows:
$ $
Profits on ordinary activities before tax 900,000
Taxation (100,000)
Profit on ordinary activities after-tax 800,000
Dividends: interim (paid) 100,000
Final 300,000 400,000
Retained profits 400,000
The market price share is currently 79c cum div.
What Is the P/E ratio (ex div}?
A. 9.5
B. 9.9
C. 8.8
D. 9.4
Question 12
Which THREE of the below are included amongst the principles that the International Integrated
Reporting Council (IIRC's) recommend that entities should follow when preparing an integrated
report?
A. Reliability and completeness
B. Understandability
C. Stakeholder relationships
D. Connectivity of information
E. Ethics and integrity
F. Relevance

Question 13
Which THREE of the following statements are correct?
A. A share buy-back will increase the level of liquidity of the company undertaking it
B. A stock split will leave each shareholder with fewer shares
C. A scrip dividend may lead to some shareholders receiving cash from the company
D. An enhanced scrip dividend involves offering shareholders a choice between cash and
shares
E. A special dividend is the payment of cash to all the company's shareholders

Question 14
Company W wishes to borrow funds at a variable rate of interest, its bank has suggested it enters
into a swap with Company Y in order to reduce its borrowing costs while borrowing at a variable
rate of interest.
State whether the following comments are true or false.
The swap will generate a benefit for both Company X and Company Y as long as
one company can borrow more cheaply in one type of debt and the other company
can borrow more cheaply in the other type of debt
The swap can also be used to reduce interest rate risk
An interest rate swap can only be entered into if the two counterparties both wish
to borrow in the same currency

Question 15

 Sonntag Co has a weighted average cost of capital of 12%.

 The market premium for risk is 6% and the risk free rate of return is 3%.
 Sonntag is an ungeared company.
What is Sonntag's asset beta (to 1 decimal place)? __________.

Question 16
Insert the following theories into the box that best matches their description.

 Traditional theory
 Pecking order theory
 Trade off theory

A. Firms will, in the real world, finance projects in a particular order

 Use internal funds if available
 Use debt
B. A company's weighted average cost of capital can be optimized by introducing
an appropriate level of gearing.
C. The level of gearing that is appropriate for a business depends on its specific
business context. Mature, asset intensive, industries tend to have high gearing;
which reflects the advantages that debt finance can bring and the reduced risk
of default

Question 17
The Jordasian government has recently introduced legislation in its own country which allows
overseas companies to use brought forward losses in Jordasian companies to reduce the tax liability
of overseas parent companies.
All other things being equal, which of the following statements is/are correct?
A. This tax law will increase the attractiveness of Jordasian companies as takeover targets.
B. This tax law will reduce the incidence of cross-border acquisitions involving Jordasian
companies.
C. This tax law will make it more difficult for international groups that include Jordasian
companies to trade in goods and services
D. This tax law will make it easier for Jordasian companies to launch successful takeover bids
of overseas companies
Question 18
An investor makes all his investment decisions just by analysing historical share price movements
and expects to beat the market by predicting future price changes.
What type of stock market efficiency is the investor assuming?
A. Weak form efficiency.
B. Semi-strong form efficiency.
C. Strong form efficiency.
D. No efficiency at all.

Question 19
The use of inflation rates to forecast exchange rates between two currencies is an application of
which one of the following?
A. Modigliani & Miller's theory of dividend irrelevance
B. Purchasing power parity
C. Interest rate parity
D. Sensitivity analysis
Question 20
Which of the following payments are most likely to be made as a part of an earn-out agreement?
A. Management bonus incentive payments.
B. Generous redundancy payments for management.
C. Incentive payments to sales people.
D. Part-payment for the sale of a business
Question 21
(EPS x Dividend payout %) ^ (EPS x P/E ratio)
The above formula would generate which of the following financial indicators?
A. Cost of equity
B. Dividend cover
C. Return on equity
D. Dividend yield

Question 22
Which THREE of the below are amongst the International Integrated Reporting Council's (IIRC's)
recommended content for an integrated report?
A. Risks and opportunities
 B. Strategy and resource allocation
C. The nature of the business
D. Governance and business model
E. Critical performance measures and indicators
F. Stakeholder engagement

Question 23
Which two of the following assumptions did Modigliani and Miller make when formulating their
theory of dividend Irrelevance?
A. The cost of raising finance is a personal expense but not a corporate one
B. Buying and selling shares bore no administrative or transaction cost
C. Only companies paid taxes on their profits
D. Individuals paid capital gains tax only
E. Taxes did not exist
Question 24
Company S can borrow $42 million at a variable rate of LIBOR + 3%. Company T can borrow
$42 million at a variable rate of LIBOR + 3.5%. Company S can borrow the same amount at a
fixed rate of 6.5% and Company T can borrow at a fixed rate of 6.8%.
What is the potential saving before bank fees to be shared between Company S and Company T?
A. Nil
B. 0.1%
C. 0.2%
D. 0.3%

Question 25
Company X will raise $150 million from a rights issue of shares, to finance a new project.
Which THREE of the following are most likely to be affected by the choice of discount at which
the shares are issued?
A. Cost of underwriting
B. WACC
C. Earnings per share
D. Shareholder wealth
E. T.E.R.
Question 26
BT Co is purchasing a foreign company, WW, which will be set up as a subsidiary in country Z.
The currency of country Z is the Z$. Which of the following Is most likely to influence BT to set
up WW with a lower level of gearing?

A. High levels of political risk in country Z

B. High levels of corporation tax in Country Z
C. A forecast fall in the value of the Z$
D. Thin capitalization rules

Question 27
Match the following terms to their definitions.

 Economies of scale
 Synergies
 Golden parachutes
The additional value generated from combining together two companies over
and above that which would be generated if the companies were kept separate
Large severance pay deals for directors triggered by a serious takeover bid by a
third party
Savings in cost that are generated by an entity becoming larger

Question 28
A trainee accountant has produced an analysis of forecast project cash flows to be used in the
valuation of a subsidiary that Sanso Co plans to sell on the 1st January next year. The subsidiary
has forecast pre-tax net operating cash flows of $200 million for next year, and this is expected to
be approximately the same in following years. Tax is paid at 30% one year in arrears.
The subsidiary will need to purchase essential new equipment at the start of the next year costing
$150 million. Tax depreciation allowances can be claimed on a straight line basis over 5 years for
this equipment, no residual value is expected in 5 years’ time. The subsidiary's year end is 31
December.
The trainee accountant's analysis is provided below (all figures are in $m). All cash flows can be
assumed to be received at the end of the year to which they relate unless otherwise stated.
Select the two errors in the table using each cells letter (in alphabetical order).
Time 0 1 2 3-6 7 onwards
Net operating A 200 B 200 C 200 D 200 E
cash flows
(NOCF)
Tax on NOCF F G (60) H (60) I (60) J
New equipment (150) K L M N O

Tax relief on P Q R S T
new
equipment
Error 1:
Error 2:

Question 29
HAM is a company based in the Eurozone and whose base currency is the Euro. It is planning to
acquire the entire share capital of a company called
DUF which is based in a country that uses the US Dollar ($) as its base currency. A cash flow
valuation is being prepared for the acquisition.
Inflation in the Eurozone is expected to be 5% and 2% in the USA for the foreseeable future.
All other things being equal what impact will the expected exchange rate movement have on the
Euro-denominated valuation of Company DUF today?
A. No impact
B. Increase
C. Decrease
D. There is no expected exchange rate movement

Question 30
S9X is a venture capital firm which provides significant funds to businesses engaged in the
development of new technology in the medical sector. S9X is negotiating an equity finance
package for a startup business, DDK. S9X wishes to invest in DKK for a maximum of 4 years,
after which S9X wishes to withdraw from its investment.
Which two of the following are unlikely to provide a satisfactory exit route for S9X?
 A. Grant an option to DKK to borrow funds from S9X in four years so it can buy its shares
back from S9X
B. Plan to float the DKK shares on a stock exchange in four years
C. An equity ratchet in the event of poor returns
D. Sell the DKK shares in four years’ time to a private equity firm for cash
E. Arrange for the DKK directors to buy back the shares from S9X in the third and fourth
years of the investment for cash

Question 31
Dividend yield is 6% Earnings per share is 45 cents. Price to earnings ratio is 22
What is the dividend per share?
A. 1.3 cents
B. 2.7 cents
C. 59.4 cents
D. 990 cents

Question 32
AA is a car manufacturer. Its key assets are:

 Factories
 Plant and machinery
 Warehouses
 Inventory (raw materials, work in progress, finished goods)
The International Integrated Reporting Council (IIRC) has created categories of capital for
inclusion where relevant in an integrated report.
Which category of capital do the above assets relate to?
A. Financial capital
B. Natural capital
C. Manufactured capital
D. Social and relationship capital
Question 33
Complete the following sentence with words from the list below, about dividend policy and how
it is affected by the company's lifecycle.

 Residual
 Stable growth
 Constant payout
 Irrelevant NPV
  Payback Debt
 Equity
Young companies with ambitious growth targets tend to prefer a _____________ dividends are
only paid once positive _______________ projects have been undertaken. Mature companies often
follow a _____________ or _____________ policy because their investments offer lower returns
than growth companies and they are more likely to use _____________ finance.

Question 34
Which of the following could be potential advantages of using a multi-currency debt portfolio as
part of a financing strategy?
Select all that apply
A. Company can benefit from unusually low interest rates in certain countries
B. It can help to manage translation risk
C. Exchange rate movements will always cancel each other out, thereby eliminating currency
risk for the borrower
D. Interest rate risk is always lower if the domestic currency is matched with other currencies
E. The administrative fees are lower if borrowing is in different currencies.
Question 35
Which of the following correctly describes the calculation of the cost of equity using the capital
asset
Pricing model (CAPM)?
A. Risk free rate of return with an additional premium for unsystematic risk
B. Risk free rate of return with a beta factor and the market rate of return added onto it
C. Risk-free rate of return plus the market rate of return
D. Risk-free rate of return with an additional premium for systematic risk

Question 36
Label each of the following statements as true or false:
The use of debt as a long-term source of funds prevents the reduction of earnings
per share
Operational gearing measures the degree to which a company uses debt to finance
its operations
The ability to offer good quality security will usually reduce or maintain the interest
rate offered by creditors
Question 37
Company R agreed to purchase company T at a cash price of $120 million and estimates that there
will be synergistic benefits of $25 million arising from the purchase.
Company T is wholly equity financed and has a market capitalization of $110 million.
Company R's shareholders and lenders can expect to gain from the deal as follows:
Gain (in $ million)
Company R's Shareholders
Company R's lenders

Question 38
ABC Co and DEF Co are listed companies in the same country. Their P/E ratios and current share
prices are shown below.
P/E ratio Share price ex div
ABC Co 8 $5.00
DEF Co 12 $3.90
Which of the following statements will best explain the higher P/E ratio of DEF Co?
A. DEF Co is a much larger company than ABC Co.
B. DEF Co is regarded as a higher risk investment than ABC Co, so investors are looking for
a higher return.
C. DEF Co has higher earnings per share growth prospects than ABC Co.
D. DEF Co retains a higher proportion of its annual post-tax profits than ABC Co.

Question 39
Elton Co is a parent company whose functional currency is the Z$.
Elton Co has a foreign subsidiary, Gambon Co, which is located in country G and has the G$ as
its functional currency.
The exchange rate is G$ 1: Z$ 2 and this is not expected to change in the near future.
Gambon Co has G$5 million of surplus cash which Elton wishes to use to pay a special dividend.
Gambon has already paid 20% corporation tax on profits and would need to pay withholding tax
of 10% on any cash remitted to Elton. Elton would pay tax of 15% in cash received from Gambon.
The maximum special dividend that could be paid by Elton, using funds from Gambon, is
approximately which of the following?
A. Special dividend Z$0.68 million (G$5 million x 80% x 10% x 200% x 85%)
B. Special dividend Z$7.65 million {G$5 million x 90% x 85% x 200%)
C. Special dividend Z$1.91 million {G$5 million x 90% x 85% x 50%)
D. Special dividend Z$6.12 million {G$5 million x 80% x 90% x 85% x 200%)

Question 40
GSI is an all equity financed company with 100 million shares in issue with a market value of $6
per share.
QSI is about to launch a cash bid for the acquisition of the entire share capital of SCK for $300
million.
GSI will borrow the necessary funds by issuing an irredeemable bond. Once the acquisition is
complete the combined entity will have earnings of $125 million per annum and a cost of equity
of 10%.
Taxation is charged on profits at 20%.
According to Modigliani & Miller's theory what will be the value of the QSI shares once the
acquisition is complete?
A. $900 million
B. $1,010 million
C. $1,250 million
D. $1,310 million

Question 41
Place the words TRUE or FALSE next to the following statements as appropriate.
Using a loan sourced in an overseas country can be an effective way to
manage translation and political risk.
High growth companies are inherently risky because of the speed of their
transformation as they grow so they usually require low levels of debt and
high dividend payout ratios.
Withholding tax increases the political risk associated with making
investments overseas
Question 42
Which THREE of the following statements are true in relation to the International Integrated
Reporting Council?
A. It offers two options for disclosure - the core option (containing the essential elements of a
sustainability report) and the comprehensive option (requiring additional standard
disclosures).
B. It is a global coalition of regulators, investors, companies, standard setters, the accounting
profession and NGOs.
C. Its guidelines break down the dimensions of a business' activities, products and services
into the three categories of economic, environmental and social.
D. Its specific standard disclosures cover disclosures on management approach and indicators.
E. Its long term vision is a world in which integrated thinking is embedded within mainstream
business practice in public and private sectors, facilitated by integrating reporting as the
corporate reporting norm.
F. The three fundamental concepts underpinning integrated reporting are value creation for
the organisation and others, the capitals and the value creation process.

Question 43
Which of the following is not a valid reason why the directors of Company Z, a listed company,
might decide to retain earnings rather than pay them out as dividends?
A. Finance from retained earnings has no cost as a source of finance.
B. Z has historically paid out low dividends and Z's shareholders are known to be more
interested in capital gains.
C. Retention of earnings avoids the possibility of a change in control resulting from an issue
of new shares.
D. Retention of earnings allows the directors to undertake investment projects without
involving the shareholders.
Question 44
Assess which, if either, of the following statements is true
An operating lease will be more expensive than a finance lease over any given
time period
A finance lease creates higher levels of commercial risk for the lessee than an
operating lease
Question 45
The following data has been taken from the annual reports of a single company:
Year ended 31 December 20X1 20X2 20X3 20X4
Earnings ($ million) 120 160 180 210
Number of shares in issue at the end of the year (million) 100 150 150 150

The company issued 50 million new shares by means of a rights issue on 03 January 20X2.
The latest annual report lists growth in earnings per share as a financial objective.
The compound average annual growth rate in earnings per share achieved between 20X1 and 20X4
is approximately:
A. 5.3%
B. 5.6%
C. 20.5%
D. 25.0%

Question 46
Company DK4 is an ungeared company and has a weighted average cost of capital of 14%. The
company is about to introduce long-term debt into its capital structure in order to reduce its
weighted average cost of capital.

This is consistent with which theories?

Select all that apply.

A. Interest rate parity theory

B. Pecking order theory
C. Modigliani & Miller's theory with tax
D. Modigliani & Miller's theory without tax
E. Traditional theory of gearing
Question 47
Which of the following are more likely to be advantages of horizontal acquisition rather than
conglomerate or vertical acquisition?
Select all that apply.
A. Economies of scale
B. Reduction of competition
C. Reducing risk by creating a broader portfolio
D. Acquisition of undervalued companies
E. Securing key elements of the value chain

Question 48
Pesto Co is a supplier to high class restaurants; it is a profitable, high growth, company - as
reflected in its P/E ratio of 15.
The directors of Pesto Co are considering the acquisition of Lomein Ltd, a rival company that has
been underperforming in recent years. Lomein's profits before tax have been constant at around
$400,000. Lomein has an estimated cost of equity of 10%, and pays out all of its earnings as a
dividend. The tax rate is 28%.
Which of the following is the best estimate of the value of Lomein under Pesto's ownership?
A. $6m
B. $2.88m
C. $4m
D. $4.32m

Question 49
Complete the following paragraph with the available words below.

 Nominal
 Real
 Inflation
Interest rates used in the Interest Rate Parity (IRP) formula are the _____________ rates that is
they reflect the level of inflation. If ______________ rates are available they will have to be
adjusted before being used in the IRP formula.
Question 50
C Co is planning the acquisition of E Co, one of its key rivals. The following information is
available:

C Co E Co
NPV of cash flows pre-acquisition ($m) 100 80
NPV post acquisition 195 N/A
The maximum price that C Co should offer for the equity of E Co is: $______________m

Question 51
It is currently half way through the financial year. A toy manufacturer has produced the following
forecast data for the next 6 month (183 day) period to show its bank.
$000
Sales revenue (cash sales) 17,200
Purchases (60 day credit) 8,400
Other costs (settled immediately) 8,000

In the previous 6 months, (183 day) period prior to the forecast the purchases were also $8,400,000
and on 60 day credit terms.
The company has an overdraft balance of $100,000. The agreed overdraft facility is $1,800,000.
Sales and purchases can be assumed to arise evenly over the period.

If all suppliers were to suddenly withdraw credit at the end of month 6, would the overdraft facility
be adequate?
A. Yes, the bank account would not be overdrawn.
B. Yes, approximately $1,020,000 of the overdraft facility would still be available for
drawdown.
C. No, the overdraft facility would be exceeded by approximately $360,000.
D. No, the overdraft facility would be exceeded by approximately $2,160,000.
Question 52
CIMA amongst other organisations have been participating on the International Integrated
Reporting Council's (IIRC) Pilot Programme.
CIMA's most recent annual report mentions how they create value from the interaction between
CIMA employees, students, members, employers, partners and industry bodies and society.
Which type of IIRC capital does the above relate to?
A. Natural capital
B. Financial capital
C. Human capital
D. Social and relationship capital
Question 53
Which of the following is least likely to be a benefit of a share repurchase scheme?
A. Finding a use for surplus cash.
B. Increase in earnings per share.
C. Increase in gearing to reduce the weighted average cost of capital.
D. An immediate boost to shareholder wealth as they receive funds from the repurchase.

Question 54
Which of the following is not true for a finance lease?
A. The lease is flexible and can be renegotiated with minimal early termination fees.
B. The lease has a primary period which covers all or most of the useful economic life of the
asset
C. The lessee is responsible for servicing and maintenance of the asset.
D. The lessee records the leased asset as a non-current asset in its statement of financial
position.

Question 55
Which of the following statements are correct?
Select all that apply.
A. Standard deviation can be used to measure the systematic risk of a share.
B. Systematic risk can only be reduced by investing in a diversified portfolio of investments
C. Investing in a share that has a high standard deviation can reduce systematic risk in the
investor's portfolio
D. Unsystematic risk refers to the variability of returns from a share due to factors unique to
the firm's context
 E. Including one extra share in one's portfolio of investments will always reduce the
unsystematic risk but not the systematic risk of the portfolio.

Question 56
Company SV9 is an ungeared company with a cost of equity of 11% and is considering adjusting
it’s gearing by taking out a loan at 5% and using it to buy back some equity. After the buyback
Company SV9 will have a debt to equity ratio of 1:2. Corporation tax is 20%.
What will be the new cost of equity for Company SV9 according to Modigliani and Miller after
the issue of new debt?
Answer to 1 decimal place of a percent is _______________ %

Question 57
Which one of the following types of acquisition is most likely to lead to the intervention by
competition authorities?
A. One where post-acquisition integration problems are likely
B. Horizontal.
C. Conglomerate
D. Cross-border

Question 58
Company VX is considering making a bid for Company Z.
Company Z is a listed company with 250 million shares in issue.
Company VX has an established a range of values for Company Z as follows:
Book value of net assets $700 million
Realizable value of net assets $800 million
Earnings valuation applied to forecast earnings $1,050 million
Market capitalization $1,000 million
VX should offer Z's shareholders a share price of AT LEAST $ __________ per share.
(Give your answer to the nearest whole number per share)
Question 59
Company DON is preparing a cash flow valuation of Company LXM. The government is prepared
to provide an incentive to Company DON for its investment in LXM. The incentive is in the form
of a non-repayable and non-taxable grant of $1 million at the time of the investment and $1 million
at the beginning of the second year following the acquisition. Both companies have a cost of capital
of 10%.
Use the words from the lists below to complete the statement.
Blank 1

 increase
 decrease
Blank 2

 $2 million
 $1.9 million
 $1.8 million
 $1.7 million
The grant will _____________ the valuation of Company LXM by ______________.
Question 60
YY Co is negotiating the sale of an underperforming division to ZZ Co. The division currently has
gearing of 50% debt and 50% equity but will be sold free of any debt.
Which one of the following valuation approaches is LIKELY to be the most useful to YY Co when
negotiating the sales price?
A. Bootstrapping, applying YY's P/E ratio
B. Assets basis
C. The division's current free cash flows to equity discounted at YY s cost of equity.
D. The division's current free cash flows discounted at YY's weighted average cost of capital.