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正确答案：B

正确答案：

(c) Report on the proposed adjustment of gearing through the repurchase of ordinary shares
The effect of capital structure on the value of a company is not fully understood.
Increasing the proportion of debt in the capital structure may reduce the overall cost of capital due to the interest on debt being a tax allowable expense. Even if a company is in a non-tax paying position, mixing additional low cost debt with relatively expensive equity might reduce the weighted average cost of capital. In such circumstances the proposed strategy to increase gearing would have some validity. However, increasing gearing can also bring problems. Risk to investors, and therefore the required returns on equity and debt, will increase as gearing increases. Very high levels of gearing might lead to
direct and indirect bankruptcy costs, with a detrimental effect on cash flow and corporate value. Any benefits from increasing the proportion of debt in the capital structure will be to some extent offset as a result of increased risk with high gearing.
The revised estimates of the effect on the cost of capital and value of Semer are not likely to be accurate. Reasons for this include:
(i) The company will not be able to repurchase the necessary shares at their current market value. Approximately ￡240 million value of equity would need to be repurchased, or more than one third of the existing market value of equity.
As repurchases take place it is likely that the share price will significantly increase.
(ii) The cost of debt is unlikely to remain constant. As more debt is issued lenders will demand a higher interest rate to compensate for the extra risk resulting from higher gearing levels. The cost of equity will also increase with higher gearing. These effects will increase the weighted average cost of capital to a higher level than that estimated.
(iii) The precise market values of debt and equity after the repurchase are unknown, and again will reflect the market attitude
to the new risk of the higher gearing.
The value of the company is likely to be much lower than that estimated, as the weighted average cost of capital is likely to be underestimated.

正确答案：
(ii) Several significant financial statement risks are indicated by the press cutting.
Overstatement of property, plant and equipment
Medix Co has constructed a research laboratory which is likely to be impaired at the year end. The local authority has
the power to shut down the facility, and it is clear from the press cutting that this is likely to happen before the year end.
Following IAS 36 Impairment of Assets, the premises should be written down to recoverable amount, and the
impairment loss recognised as an expense. The directors should carry out an impairment review before the year end. If
the premises cannot be used as intended then the recoverable amount (measured using the higher of value in use and
fair value less selling cost) is likely to be less than current carrying value. In this case, assuming the local authority is
successful in shutting down the research laboratory, the recoverable amount is likely to be nil, as the premises have no
value in use, as it will never be used commercially, and has no market value as it is likely to be demolished.
In addition, any tangible assets such as laboratory equipment located at the premises should be tested for impairment
as if the company cannot use the premises then the assets contained within it are likely to have a lower recoverable
amount than carrying value.
Contingency – fines or penalties imposed by local authority
The press cutting indicates that Medix Co has been sued before, and that the local authority may again take legal action
against the company. IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that a provision should be
recognised if the company has a probable obligation at the year end which can be measured reliably. If payment is
deemed only possible at the year end, then disclosure of the contingent liability should be made in a note to the financial
statements.
If the local authority commences legal proceedings against Medix Co before the year end of 30 June 2008, then
management should assess the probability of payment. The financial statement risk is not recognising a provision (and
associated expense within the income statement), or not disclosing a contingency.
Demolition costs
The local authority may require Medix Co to demolish the premises. If this demand is made before the year end, Medix
Co should recognise a provision for demolition costs as an unavoidable legal obligation would have been created. The
financial statement risk is that in this situation, Medix Co fails to recognise a provision and associated expense within
the income statement.
Going concern
The above issues could indicate that the company may not continue in operational existence. The potential lack of
disclosure of these issues represents a financial statement risk.