Business Finance

**Section A** Crescent Real Estate is seeking to raise funds for a new commercial development in a manner compliant with Islamic finance principles. They wish to issue financial instruments that represent an ownership interest in the underlying real estate asset, rather than a debt obligation. Which Islamic finance instrument is Crescent Real Estate most likely to issue?

**Section A** BioGenix, a profitable biotechnology firm, needs to raise $20 million for clinical trials. According to the Pecking Order Theory of capital structure, which source of finance will BioGenix prioritize FIRST?

**Section A** PrintConstruct, a 3D-printing construction firm, has unfortunately gone into liquidation. The liquidator is distributing the remaining assets. Which TWO of the following stakeholder groups rank HIGHER than unsecured trade payables in the statutory hierarchy of liquidation?

**Section B - Case 2: Solaris Grid** *Scenario:* Solaris Grid is a private solar panel installation company looking to be acquired. The acquirer is valuing Solaris Grid using the Free Cash Flow to Firm (FCFF) method. Solaris Grid's FCFF for the coming year (Year 1) is projected to be $4 million. These cash flows are expected to grow at a constant rate of 3% per annum in perpetuity. The company's Weighted Average Cost of Capital (WACC) is 11%, and its Cost of Equity is 15%. The market value of Solaris Grid's debt is $12 million. **Question:** Assume instead that Solaris Grid is already a public company with 10 million shares in issue, currently trading at $3.80 per share. They announce a 1-for-4 rights issue at a discount price of $3.00 per share to raise funds for expansion. What is the Theoretical Ex-Rights Price (TERP) per share?

Section A Crescent Holdings is looking to raise funds in compliance with Islamic finance principles. They are considering issuing Sukuk. Which of the following statements regarding Sukuk are correct? (Select ALL that apply)

Section A According to the Pecking Order Theory of capital structure, which of the following statements are TRUE regarding how a company should prioritize its sources of finance? (Select ALL that apply)

Section B - Case 2: Helios Co Helios Co has $10 million of convertible bonds in issue. The bonds have a nominal value of $100, pay an annual coupon of 5%, and are due to be redeemed in 3 years at par. Alternatively, they can be converted into 20 ordinary shares per $100 bond in 3 years. The current share price is $4.50 and is expected to grow at 6% per year. Investors require a return of 8% on similar non-convertible debt. What is the expected conversion value of one $100 bond in 3 years' time?

Section C - Constructed Response GreenYield Co is an agri-tech firm that has developed a new automated irrigation system. To fund the mass production and a permanent increase in working capital, the company needs to raise $20 million. Current financial position: - Ordinary shares in issue: 10 million - Current share price: $5.00 - Profit Before Interest and Tax (PBIT): $8 million - Current long-term debt: $10 million (paying 5% interest) - Corporation tax rate: 25% The board is considering two financing options: Option 1: A rights issue at a 20% discount to the current market price. Option 2: A new bank loan at an interest rate of 8% per annum. Assume the new funds will immediately generate an additional $3 million in PBIT. Required: (a) For Option 1 (Rights Issue): (i) Calculate the issue price per share and the number of new shares to be issued. (3 marks) (ii) Calculate the Theoretical Ex-Rights Price (TERP). (3 marks) (b) Calculate the expected Earnings Per Share (EPS) and Interest Cover ratio for BOTH Option 1 and Option 2. (8 marks) (c) Discuss the relative merits of aggressive versus conservative working capital financing policies, and advise which policy GreenYield Co appears to be adopting by seeking long-term finance for its working capital needs. (6 marks)

A government is funding a new offshore wind farm and wishes to attract Islamic finance investors. They decide to issue 'Green Sukuk' rather than conventional bonds. Which of the following statements represents a fundamental difference between Sukuk and conventional bonds?

'BioGenix', a biotechnology firm, has exhausted its retained earnings after funding extensive R&D. According to the Pecking Order Theory of capital structure, what should be BioGenix's next preferred source of finance?

CASE 2: AERODRONE TECH AeroDrone Tech is an ungeared manufacturer of commercial delivery drones. The company currently has a cost of equity of 12%. The board is considering a major restructuring to issue debt and repurchase equity. The corporate tax rate is 25%. The risk-free rate is 4% and the equity risk premium is 6%. According to Modigliani and Miller's theory with corporate taxes, what will be the impact of issuing debt on AeroDrone's Weighted Average Cost of Capital (WACC) and market value?

**Section A** Crescent Holdings, a cross-border multinational, wishes to raise $50 million for a new infrastructure project while strictly adhering to Islamic finance principles. They intend to issue financial instruments that represent proportional ownership in the tangible assets of the project, providing investors with a share of the profits generated by those assets. Which Islamic finance instrument is Crescent Holdings planning to issue?

**Section A** According to the Pecking Order Theory of capital structure, companies prioritize their sources of financing based on the principle of least effort and lowest information asymmetry. Which TWO of the following statements align with the Pecking Order Theory?

**Section A** Crescent Infrastructure is seeking Sharia-compliant financing for a new toll road project. They are considering a contract where one party provides the capital and the other provides the expertise and management. Profits are shared according to a pre-agreed ratio, but financial losses are borne solely by the capital provider. Which Islamic finance term describes this specific arrangement?

**Section A** Nordic Timber PLC, a cross-border multinational, is raising capital via a 1-for-4 rights issue. The current market price of the shares is $4.50. The issue price for the new shares is set at $3.00. What is the Theoretical Ex-Rights Price (TERP) per share?

**Section B - Case 2: Quantum Mesh Inc** *Scenario:* Quantum Mesh Inc is a tech startup developing AI-driven satellite mesh networks. A venture capital firm is considering a buyout. Quantum Mesh has an operating profit (EBIT) of $5m, depreciation of $1m, and a corporate tax rate of 20%. Capital expenditure for the year was $1.5m, and working capital increased by $0.5m. **Question 2:** Quantum Mesh previously issued convertible bonds. The bonds have a nominal value of $100, a coupon rate of 5%, and 3 years to maturity. Similar non-convertible debt yields 8%. What is the 'floor value' of one convertible bond? (Discount factors at 8%: Yr 1-3 annuity = 2.577, Yr 3 PV = 0.794)

**Section B - Case 2: Quantum Mesh Inc** *Scenario:* Quantum Mesh Inc is a tech startup developing AI-driven satellite mesh networks. A venture capital firm is considering a buyout. Quantum Mesh has an operating profit (EBIT) of $5m, depreciation of $1m, and a corporate tax rate of 20%. Capital expenditure for the year was $1.5m, and working capital increased by $0.5m. **Question 3:** The convertible bonds currently trade at $115. Each bond can be converted into 20 ordinary shares. The current share price is $5.00. What is the conversion premium per share?

**Section B - Case 2: Quantum Mesh Inc** *Scenario:* Quantum Mesh Inc is a tech startup developing AI-driven satellite mesh networks. A venture capital firm is considering a buyout. Quantum Mesh has an operating profit (EBIT) of $5m, depreciation of $1m, and a corporate tax rate of 20%. Capital expenditure for the year was $1.5m, and working capital increased by $0.5m. **Question 5:** If Quantum Mesh decides to raise further capital independently, the CFO suggests following the Pecking Order Theory. According to the Pecking Order Theory, what is the preferred sequence of financing?

Section A A municipal water desalination plant is seeking to raise capital in compliance with Islamic finance principles. They wish to issue financial instruments that represent an ownership interest in the underlying desalination assets, generating a return from the asset's performance rather than paying interest. Which Islamic finance instrument is being described?

Section A AstroTour PLC, a space tourism company, currently has 10 million shares in issue trading at $8.00 each. To fund a new launchpad, the company announces a 1-for-4 rights issue at a discount price of $6.00 per share. What is the Theoretical Ex-Rights Price (TERP) per share?

Section B - Case 2: NeuroLink Prosthetics Scenario: NeuroLink Prosthetics is a MedTech firm. It has 10 million ordinary shares in issue, currently trading at $4.50 per share. The company's equity beta is 1.2. The risk-free rate of return is 4% and the expected return on the market portfolio is 10%. NeuroLink also has $15 million (nominal value) of 6% redeemable bonds, currently trading at $95 per $100 nominal, redeemable at par in 5 years. The corporate tax rate is 25%. NeuroLink needs to raise an additional $5 million for R&D. The CFO suggests following the Pecking Order Theory. Question: According to the Pecking Order Theory, what is the preferred order of financing sources?

Section B - Case 2: NeuroLink Prosthetics Scenario: NeuroLink Prosthetics is a MedTech firm. It has 10 million ordinary shares in issue, currently trading at $4.50 per share. The company's equity beta is 1.2. The risk-free rate of return is 4% and the expected return on the market portfolio is 10%. NeuroLink also has $15 million (nominal value) of 6% redeemable bonds, currently trading at $95 per $100 nominal, redeemable at par in 5 years. The corporate tax rate is 25%. Question: According to Modigliani and Miller's theory of capital structure WITH taxes, what happens to the WACC as a company increases its gearing (debt levels)?