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QUESTION 16 Which of the following is not a potential difficulty facing investors trying to apply Markovitz s portfolio theory in the real world? O A. The composition of the market portfolio is constantly changing over time B. Transaction costs make construction of the market portfolio expensive c. Identifying the composition of the market portfolio initially OD. The majority of shares are held by large institutional investors E. Investors cannot borrow at the risk-free rate QUESTION 17 City plc plans to buy Utd plc. The current distributable earnings of Utd pic are 12m. City estimates that it will be able to grow future earnings of td by 4% per annum. It is proposing to use an earnings yield of 11% in the valuation of Utd. Using the Earnings Yield method, what value will City put on Utd? O A. 178m O B. 109m OC. 200m OD. 114m O E. 222m QUESTION 18 Identify the incorrect statement concerning valuation methods. O A. Net asset valuations are the best way of deciding a bid price B. A major difficulty with the price/earnings ratio method is determining the earnings to which the price/earnings ratio is applied OC. The discounted cash flow method looks at the incremental cash flows arising from a proposed acquisition OD. The market capitalisation of a company reflects marginal trading in its shares O E. The dividend growth model offers a deprival value for target shareholders QUESTION 19 Identify the incorrect statement concerning valuation methods. OA. A major difficulty with the price/earnings ratio method is determining the future cash flows to which the price/earnings ratio is applied OB. The discounted cash flow method looks at the incremental cash flows arising from a proposed acquisition OC. The market capitalisation of a company reflects marginal trading in its shares OD. Net asset valuations are often of little relevance in deciding on a bid price O E. The dividend growth model offers a deprival value for target shareholders QUESTION 20 CFK ple's current share price is 4.00. An Investor is wondering whether to buy shares in CFK or warrants in the company. The warrant has duration of one year and allows the purchase of 20 CFK shares at an exercise price of 4.10. The cost of the warrant is 5.00. the share price for CFK Is 54.50 in a year's time what are the corresponding returns for buying CFK shares and warrants on CFK shares? CFK plc paid no dividend over this period. Return on shares 12.5% Return on the option 33.3% Return on shares 2.5% Return on the option 10% O Return on shares 2.5% Return on the option 33.3% O. Return on shares 12.5% Return on the option: nll Return on shares 12.5% Return on the option 10%

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