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NEW QUESTION # 75
Which three of the following are most likely be primary objectives for a newly established, unincorporated entity in the service sector?
- A. Reaching an optimum capital structure
- B. Increasing the dividend payment year on year
- C. Maintaining sufficient liquidity in the business to avoid overtrading
- D. Increasing Revenue
- E. Providing consistently high levels service quality
Answer: A,C,D
NEW QUESTION # 76
ADC is planning to acquire DEF in order to benefit from the expertise of DEF's owner 'managers Both are Listed companies. ADC is trying to decide whether to offer cash or shares in consideration for DEF's shares.
Which THREE of the following are advantages to ABC of offering shares to acquire CEF?
- A. It dilutes ownership in ABC.
- B. It results in a tax saving for ABC.
- C. It preserves liquidity
- D. The risk of poor future performance of the acquisition is shared with the DEF company shareholder.
- E. It incentivises DEF to continue creating value for the combined group
- F. It shares tie benefits of future growth with the DCT shareholder.
Answer: D,E,F
NEW QUESTION # 77
Company A has just announced a takeover bid for Company B. The two companies are large companies in the same industry_ The bid is considered to be hostile.
Company B's Board of Directors intends to try to prevent the takeover as they do not consider it to be in the best interests of shareholders Which THREE of the following are considered to be legitimate post-offer defences?
- A. Alter the memorandum and articles of association to state that a minimum of 75% of shareholders must agree to the bid before it can proceed
- B. Have all the assets independently professionally revalued to demonstrate that the offer undervalues the company
- C. Publish very optimistic financial forecasts for Company B even though the Board of Directors realises that these are highly unlikely to be achievable
- D. Make a counter bid for Company A provided such an acquisition could enhance Company B's shareholder wealth
- E. Refer the bid to the competition authorities to try to have the bid prohibited on competition grounds
Answer: A,D,E
NEW QUESTION # 78
Company A is based in country A with the AS as its functional currency. It expects to receive BS20 million from Company B in settlement of an export invoice.
The current exchange rate is A$1 =B$2 and the daily standard deviation of this exchange rate = 0 5%
What is the one-day 95% VaR in AS?
- A. A$164,500
- B. A$50,000
- C. A$82,250
- D. A$822,500
Answer: C
NEW QUESTION # 79
Company XXY operates in country X with the X$ as its currency. It is looking to acquire company ZZY which operates in country Z with the Z$ as its currency.
The assistant accountant at Company XXY has started to prepare an initial valuation of Company ZZY's equity for the first 3 years, however their valuation is incomplete. TBC' in the table below indicates that her calculations have yet to be completed.
The following information is relevant:
What is the correct figure (to the nearest million S) to include in year 3 as the present value in X$ million?
- A. X$401 million
- B. X$360 million
- C. X$504 million
- D. X$453 million
Answer: B
NEW QUESTION # 80
Two companies that operate in the same industry have different Price/Earnings (P/E) ratios as follows:
Which of the following is the most likely explanation of the different P/E ratios?
- A. Company B has a greater profit this year than Company A.
- B. Company B has higher expected future growth than Company A.
- C. Company B has higher business risk than Company A.
- D. Company B has higher gearing than Company A.
Answer: B
NEW QUESTION # 81
Companies A, B, C and D:
* are based in a country that uses the K$ as its currency.
* have an objective to grow operating profit year on year.
* have the same total levels of revenue and cost.
* trade with companies or individuals in the eurozone. All import and export trade with companies or individuals in the eurozone is priced in EUR.
Typical import/export trade for each company in a year are as follows:
Which company's growth objective is most sensitive to a movement in the EUR/K$ exchange rate?
- A. Company B
- B. Company A
- C. Company D
- D. Company C
Answer: A
NEW QUESTION # 82
A company is considering taking out $10.000,000 of floating rate bank borrowings to finance a new project.
The current rate available to the company on floating rate barrowings is 8%. The borrowings contain a covenant based on an interested cover of 5 times.
The project is expected to generate the following results:
At what interest rate on the floating rate borrowings is the bank covenant first breached?
- A. 8.0%
- B. 11.0%
- C. 9.4%
- D. 10.0%
Answer: B
NEW QUESTION # 83
A large, listed company is planning a major project that should greatly improve its share price in the long term.
These plans require a significant capital cost that the company plans to finance by debt.
All of the debt options being considered are for the same duration of time.
Which of the following sources of debt finance is likely to be the most expensive for the company over the full term of the debt?
- A. Convertible bonds
- B. Bank loan
- C. A finance lease
- D. Bonds
Answer: A
NEW QUESTION # 84
Which of the following statements about companies seeking a stock market listing is correct?
- A. A listing will require the owners to either sell a majority of their shares, or, if they retain their shares, to step down from the board.
- B. When a company seeks a listing this may unsettle its staff, potentially resulting in a loss of valued employees.
- C. A listing may make it harder for a company to raise money from its existing lenders.
- D. The enhanced reputation of the company can improve its credit rating reducing the risk of non-payment to suppliers and lenders.
Answer: D
NEW QUESTION # 85
A company has announced a rights issue of 1 new share for every 4 existing shares.
Relevant data:
* The current market price per share is $10.00.
* Rights are to be issued at a 20% discount to the current price.
* The rate of return on the new funds raised is expected to be 10%.
* The rate of return on existing funds is 5%.
What is the yield-adjusted theoretical ex-rights price?
Give your answer to two decimal places.
$ ?
Answer:
Explanation:
11.20, 11.2
NEW QUESTION # 86
A company's main objective is to achieve an average growth in dividends of 10% a year.
In the most recent financial year:
Sales are expected to grow at 8% a year over the next 5 years.
Costs are expected to grow at 5% a year over the next 5 years.
What is the minimum dividend payout ratio in 5 years' time that would allow the company to achieve its objective?
- A. 27.5%
- B. 22.5%
- C. 30.0%
- D. 21.7%
Answer: D
NEW QUESTION # 87
A company is considering either exporting its product directly to customers in a foreign country or establishing a manufacturing subsidiary in that country.
The corporate tax rate in the company's own country is 20% and 25% tax depreciation allowances are available.
Which THREE of the following would be considered advantages of establishing the subsidiary in the foreign country?
- A. The corporate tax rate in the foreign country is 40%.
- B. There are high customs duties payable on products entering the foreign country.
- C. There is a double tax treaty between the company's domestic country and the foreign country.
- D. Year 1 tax depreciation allowances of 100% are available in the foreign country.
- E. There are restrictions on companies wishing to remit profit from the foreign country.
Answer: B,C,D
NEW QUESTION # 88
A company with a market capitalisation of S50million is considering raising $1 million debt to fund a new 10-year capital investment protect
The value of this issue is considered to be small in comparison to the company's market capitalisation
The company is considering whether to raise the debt finance by either a "bond private placing' or a 'public bond issue.
Which THREE of the following statements are correct?
- A. An initial public bond issue will be administratively complex and relatively expensive for the relatively small amount of debt being raised whereas a bond private placing will be relatively less complex
- B. An initial public bond issue can be arranged relatively quickly whereas a bond private placing can take up to a year to arrange.
- C. An average investor is made aware of a potential initial public bond issue whereas the average investor is only made aware of a bond private placing after it has occurred.
- D. An initial public bond issue does not need to be underwritten whereas a bond private placing must be underwritten.
- E. The company's credit rating will be a key element in determining the interest rate payable and the potential success of either the public bond issue or the bond private placing
Answer: A,B
NEW QUESTION # 89
Company A is based in Country A where the functional currency is the A$. Currently all sales are to domestic customers in Country A. However, the company is planning to expand internationally by acquiring Company B, a distribution company in Country B, to enable it to sell goods worldwide The functional currency of Country B is the BS Company A will invoice its international customers in their local currency.
Wage increases in Country B are forecast to be modest, due to high unemployment levels, but overall inflation in Country B is forecast to be significantly higher than in Country A Which TWO of the following statements about the economic risk of the acquisition of Company B are true?
- A. Economic risk can be eliminated by using forward contracts to convert future cash flows into A$
- B. Exporting into a variety of international markets will reduce economic risk.
- C. Higher inflation will increase the project's BS returns, so the economic risk can be ignored
- D. Using purchasing power parity, AS is forecast to strengthen against B$, so the economic risk can be ignored
- E. Financing this acquisition with block denominated in B$ will reduce economic risk.
Answer: B
NEW QUESTION # 90
Company HJK is planning to bid for listed company BNM
Financial data for BNM for the financial year ended 31 December 20X1:
HJK is not forecasting any growth in these figures for the foreseeable future
Profit and cost data above should be assumed to be equivalent to cash flow data when answenng this question
Which THREE of the following approaches would be most appropriate for HJK to use to value the equity of BNM?
- A. Share price x number of shares in issue
- B. Share price x number of shares in issue plus retained profits
- C. Cash flows of S14 million discounted at the cost of equity
- D. Cash flows of $30 million (= S40 million net of tax at 25%) discounted at WACC minus the value of debt
- E. Cash flows of S24 million discounted at the cost of equity
Answer: A,B,D
NEW QUESTION # 91
A company has announced a rights issue of 1 new share for every 4 existing shares.
Relevant data:
* The current market price per share is $10.00.
* Rights are to be issued at a 20% discount to the current price.
* The rate of return on the new funds raised is expected to be 10%.
* The rate of return on existing funds is 5%.
What is the yield-adjusted theoretical ex-rights price?
Give your answer to two decimal places.
Answer:
Explanation:
$ ?
11.20, 11.2
NEW QUESTION # 92
F Co. is a large private company, the founder holds 60% of the company's share capital and her 2 children each hold 20% of the share capital.
The company requires a large amount of long-term finance to pursue expansion opportunities, the finance is required within the next 3 months. The family has agreed that an Initial Public Offering (IPO) should not be pursued at this time, because it would take up to 12 months to arrange.
The existing shareholders are currently considering raising the required finance from an established Venture Capitalist in the form of debt and equity. The Venture Capitalist has agreed to provide the required finance provided it can earn a return on investment of 25% per year. In addition, the Venture Capitalist requires 60% of the equity capital, a directorship in the company and a veto on all expenditure of a capital or revenue nature above a specified limit.
From the perspective of the family, which of the following are advantages of raising the required finance from the Venture Capitalist?
Select all that apply.
- A. The experience of the Venture Capitalist with growing businesses.
- B. The cost of the finance under the Venture Capital investment.
- C. The veto on expenditure above a specified level of a revenue or capital nature.
- D. The speed with which the finance can be obtained.
- E. The changes in shareholding as a result of the Venture Capital investment.
Answer: B,C
NEW QUESTION # 93
A listed company plans to raise $350 million to finance a major expansion programme.
The cash flow projections for the programme are subject to considerable variability.
Brief details of the programme have been public knowledge for a few weeks.
The directors are considering two financing options, either a rights issue at a 20% discount to current share price or a long term bond.
The following data is relevant:
The company's share price has fallen by 5% over the past 3 months compared with a fall in the market of
3% over the same period.
The directors favour the bond option.
However, the Chief Accountant has provided arguments for a rights issue.
Which TWO of the following arguments in favour of a right issue are correct?
- A. The recent fall in the share price makes a rights issue more attractive to the company.
- B. The administrative costs of a rights issue will be lower.
- C. The issue of bonds might limit the availability of debt finance in the future.
- D. The WACC will decrease assuming Modigliani and Miller's Theory of Capital Structure without taxes applies.
- E. The rights issue will lead to less pressure on the operating cash flows of the programme.
Answer: C,E
NEW QUESTION # 94
Company AD is planning to acquire Company DC. It is evaluating two methods of structuring the terms of the bid, which will be ether a debt-funded cash offer or a share exchange
The following Information is relevant
* The two companies are of similar size and in related industries
* AB's gearing ratio measured as debt to debt plus equity, is currently 30% based on market values. This Is the company's optimum capital structure set to reflect the risk appetite of shareholders.
* The combined company is expected to generate savings and synergies
Which THREE of the following are advantages to AB's shareholders of a debt-funded cash offer compared with a share exchange?
- A. WACC will increase f credit worthless falls too low, further increasing the returns to shareholders.
- B. Shareholder control will remain with AB's current shareholders
- C. Gearing will increase.
- D. EPS Mil Increase
- E. More of the synergistic benefits of the acquisition will accrue to AB's current shareholders.
Answer: C
NEW QUESTION # 95
The two founding directors of an unlisted geared company want to establish its value as they are intending to approach a venture capitalist for additional funding.
The funding will be used to invest in a major new project which has very high growth potential. The directors intend to sell 10% of the company to the venture capitalist They have prepared the following current valuation of the company using the divided valuation model:
The following information is relevant.
* $60,000 is the most recent dividend paid.
* 4% is the average dividend growth over the last few years.
* 10% is an estimate of the company's cost of equity using the CAPM model with the industry average asset beta Which THREE of the following are weaknesses of the valuation method used in these circumstances?
- A. It is not an appropriate valuation method for a small, 10% equity stake
- B. The company is unlikely to achieve constant growth in dividends year-on-year.
- C. The industry average asset beta is not an appropriate beta to use in CAPM in this case.
- D. CAPM cannot be used to estimate the cost of equity of an unlisted company.
- E. Future dividend growth is unlikely to reflect historical dividend growth.
Answer: A,B,E
NEW QUESTION # 96
Company ABC's management has noticed that Company BCD has quickly built up a 20% stake by buying shares in Company ABC and are concerned that this is the start of a hostile bid.
This build-up of shares triggers the poison pill provision which automatically converts the rights to buy future preference shares previously issued to existing shareholders in Company ABC to full ordinary shares
What is the most likely impact of the triggering of a poison pill strategy at this stage in the bidding process?
- A. Company BCD loses value on its shareholding and has to sell at a loss before losing more value
- B. The threat of a hostile takeover is reduced because Company ABC becomes more expensive to buy.
- C. Company ABC becomes less attractive due to a fall in value of the shares as a result of the discount.
- D. It is too late for a poison pill strategy to have any impact on a hostile takeover because Company BCD has already built up a significant stake in Company ABC.
Answer: B
NEW QUESTION # 97
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CIMA F3 Exam is divided into two sections. The first section assesses the candidate's understanding of financial management concepts such as cost management, pricing strategies, and investment appraisal. The second section focuses on strategic financial management, including topics such as risk management, mergers and acquisitions, and corporate finance. CIMAPRA19-F03-1 exam is designed to test a candidate's ability to apply these concepts in real-world scenarios, making it a challenging test of a candidate's financial management skills.
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