Various MCQ's

[Adam Ahmed]

Hey all,

Wondering if anyone could provide me with some assistance to the following MCQ's. Particularly, the reasoning to how the correct answer is derived. The correct answer for each MCQ is highlighted in green.

Thanks in advance.

 

[Lynn Birchall]

Hi Adam

Hope these help:

Q1 - We're interested in the order in which various parties are paid back if the company is liquidated. As equity ranks lower than trade creditors, the numbers about equity (ordinary / preference shares) aren't needed. The £0.6m secured debenture gets paid first. To then pay 20% to the next £3.7m, need a total of £0.6 + 20% of £3.7m = £1.34m.

Q2 - In a share issue by tender, everyone will pay the same price. The company will look to see what that price needs to be in order to be able to issue 1m shares. The company could issue 250k shares at 1.30 each. It could issue 650k shares at 1.20 each. But to issue 1m shares the issue price will need to be 1.00 each, so will raise £1m. The course ref for this is Chapter 6 Section 1.5 if you want to remind yourself of the process.

Q3 - If the buyer of the put option exercises, they will sell 1,000 shares to Company A at £5 per share. The worse outcome for Company A would be to be required to buy 1000 shares at £5 per share and for these shares to actually have no value. This loss of £5,000 would be partially offset by the £500 option premium that A had received from the buyer of the option.

Best wishes
Lynn