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Format of the CIMA F3: Financial Strategy Exam
- Format: Numerous choices, multiple responses
- Passing score: 70 percent
- Number of questions: 60
- Length of Examination: 90 minutes
- Language: English
NEW QUESTION 119
A company is reporting under IFRS 7 Financial Instruments: Disclosures for the first time and the directors are concerned about whether this will lead to the disclosure of information that could affect the company's share price.
The company is based in a country that uses the A$ but 40% of revenue relates to export sales to the USA and priced in US$.
When the company reports under IFRS 7 for the first time, the share price is most likely to:
- A. Increase due to greater clarity of information available on the extent of US$ risks and how they are managed.
- B. Decrease since investors place a lower value on higher risk businesses.
- C. Either increase or decrease depending on market reaction to new information on how financial risk is managed.
- D. Stay the same since US$ risk can already be quantified from segmental analysis disclosures included elsewhere in the annual report.
Answer: C
NEW QUESTION 120
An analyst has valued a company using the free cash flow valuation model.
The analyst used the following data in determining the value:
* Estimated free cashflow in 1 year's time = $100,000
* Estimated growth in free cashflow after the first year = 5% each year indefinitely
* Appropriate cost of equity = 10%
The result produced by the analyst was as follows:
Value of equity = $100,000 (1+0.05)/0.10 = $1,050,000
The analyst made a number of errors in determining the value.
By how much has the analyst undervalued the company?
- A. $1,050,000
- B. $950,000
- C. $2,100,000
- D. $2,000,000
Answer: B
NEW QUESTION 121
DFG is a successful company and its shares are listed on a recognised stock exchange. The company's gearing ratio is currently in line with the industry average and the directors of DFG do not want to increase the company's financial risk. The company does not carry a large cash balance and its shareholders are not expected to be willing to support a rights issue at this time LMB is a small services company owned and managed by a small board of directors who are going to retire within the next year DFG wishes to purchase LMB and has approached LMB's owners, who are broadly open to the proposal, to discuss the bid and the consideration to be offered by DFG. LMB's owners explain to DFG that they are also keen to defer any tax liabilities they would be subject to on receipt of the consideration.
Based on the information provided, which of the following types of consideration would be most suitable to finance the acquisition?
- A. DFG shares for a percentage of the current value of LMB plus a three year earn-out arrangement
- B. DFG shares for the current value of LMB
- C. Loan stock in DFG for the current value of LMB
- D. Cash for the current value of LMB
Answer: B
NEW QUESTION 122
An unlisted company.
* Is owned by the original founders and members of their families
* Pays annual dividends each year depending on the cash requirements of the dominant shareholders.
* Has earnings that are highly sensitive to underlying economic conditions.
* Is a small business in a large Industry where there are listed companies with comparable capital structures Which of the following methods is likely to give the most accurate equity value for this unlisted company?
- A. Discounted cash flow analysis at WACC (based on cash flows after tax but before financing) plus the market value of debt.
- B. Dividend valuation model.
- C. P/E based valuation using the P/E of a similar company.
- D. Net asset valuation
Answer: B
NEW QUESTION 123
A company is considering whether to lease or buy an asset.
The following data applies:
* The bank will charge interest at 7.14% per annum
* The asset will cost $1 million
* Tax-allowable depreciation is available on a straight line basis over 5 years
* There is no residual value
* Corporate tax is paid at 30% in the year when the profit is earned
What is the NPV of the buy option?
Give your answer to the nearest $000.
Answer:
Explanation:
$ ?
740
NEW QUESTION 124
A venture capitalist invests in a company by means of buying:
* 9 million shares for $2 a share and
* 8% bonds with a nominal value of $2 million, repayable at par in 3 years' time.
The venture capitalist expects a return on the equity portion of the investment of at least 20% a year on a compound basis over the first 3 years of the investment.
The company has 10 million shares in issue.
What is the minimum total equity value for the company in 3 years' time required to satisify the venture capitalist's expected return?
Give your answer to the nearest $ million.
Answer:
Explanation:
$ million.
34, 35, 34000000, 35000000
NEW QUESTION 125
A company has:
* $7 million market value of equity
* $5 million market value of debt
* WACC of 9.375%
* Corporate income tax rate of 15%
According to Modigliani and Miller's theory of capital structure with tax, what is the ungeared cost of equity?
- A. 10.00%
- B. 14.52%
- C. 8.79%
- D. 10.27%
Answer: A
NEW QUESTION 126
An unlisted company is attempting to value its equity using the dividend valuation model.
Relevant information is as follows:
* A dividend of $500,000 has just been paid.
* Dividend growth of 8% is expected for the foreseeable future.
* Earnings growth of 6% is expected for the foreseeable future.
* The cost of equity of a proxy listed company is 15%.
* The risk premium required due to the company being unlisted is 3%.
The calculation that has been performed is as follows:
Equity value = $540,000 / (0.18 - 0.08) = $5,400,000
What is the fault with the calculation that has been performed?
- A. The dividend growth rate is unsuitable given that earning growth is lower than dividend growth.
- B. The cost of equity used in the calculation should have been 12% (15% subtract 3%).
- C. The cost of equity used in the calculation should have been 15%; no adjustment was necessary.
- D. The dividend cashflow used should have been $500,000 rather than $540,000.
Answer: A
NEW QUESTION 127
A profit-seeking company intends to acquire another company for a variety of reasons, primarily to enhance shareholder wealth.
Which THREE of the following offer the greatest potential for enhancing shareholder wealth?
- A. Exploiting production synergies.
- B. Achieving greater cultural diversity.
- C. Achieving more press coverage for the company.
- D. Creating new opportunities for employees.
- E. Acquiring Intellectual Property assets.
- F. Elimination of existing competition.
Answer: A,E,F
NEW QUESTION 128
A company intends to sell one of its business units. Company W, by a management buyout (MBO). A selling price of S200 million has been agreed.
The managers are discussing with a bank and a venture capital company (VCC) the following financing proposal.
The VCC requires a minimum return on its equity investment In the MBO of 35% a year on a compound basis over 5 years What is the minimum total equity value of Company W in 5 years time in order to meet the VCC's required return? Give your answer to one decimal place.
Answer:
Explanation:
65
NEW QUESTION 129
A company in country T is considering either exporting its product directly to customers in country P or establishing a manufacturing subsidiary in country P.
The corporate tax rate in country T is 20% and 25% tax depreciation allowances are available Which TIIRCC of the following would be considered advantages of establishing a subsidiary in country T?
- A. Year 1 tax depreciation allowances of 100% are available in country P.
- B. There are high customs cuties payable of products entering country P.
- C. The corporate tsx rate in country P is 40%.
- D. There is a double tax treaty between country T and country P.
- E. There are restrictions on companies wishing to remit profit from country P
Answer: A,B,D
NEW QUESTION 130
Company C invests heavily in Research and Development an need to raise $45 million to finance future projects. It has decided to use equity finance raised by a tender offer, The following tender offers have been received from potential investors:
Company C wishes to select an offer price that will project shareholders from a significant dilution of control but still raise the required amount of finance.
What offer price should Company C's select?
- A. $4.00
- B. $4.50
- C. $4.75
- D. $4.25
Answer: B
NEW QUESTION 131
Companies A, B, C and D:
* are based in a country that uses the K$ 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 C
- D. Company D
Answer: A
NEW QUESTION 132
XYZ is a multi-national group with subsidiary AA in Country A and subsidiary BB in Country B.
The capital structures of AA and BB are set up to take advantage of the lower tax rate in Country A Thin capitalisation rules in Country B will limit the ability for either AA or BB to claim tax relief on:
- A. interest paid by BB
- B. interest paid by AA
- C. interest earned by BB.
- D. interest earned by AA
Answer: A
NEW QUESTION 133
A company intends to sell one of its business units, Company R by a management buyout (MBO).
A selling price of $100 million has been agreed.
The managers are discussing with a bank and a venture capital company (VCC) the following financing proposal:
The VCC requires a minimum return on its equity investment in the MBO of 30% a year on a compound basis over 5 years.
What is the minimum TOTAL equity value of Company R in 5 years time in order to meet the VCC's required return?
Give your answer to one decimal place.
$ ? million
Answer:
Explanation:
111.4, 111, 111.0, 111.1, 111.2, 111.3, 111.5, 111.6, 111.7
NEW QUESTION 134
A company has 6 million shares in issue. Each share has a market value of $4.00.
$9 million is to be raised using a rights issue.
Two directors disagree on the discount to be offered when the new shares are issued.
* Director A proposes a discount of 25%
* Director B proposes a discount of 30%
Which THREE of the following statements are most likely to be correct?
- A. The rights issue price will be $3.00 under Director A's proposal.
- B. More shares will be issued under Director B's proposal than under Director A's proposal.
- C. Shareholder wealth will be higher under Director A's proposal than under Director B's proposal.
- D. The terms of the rights issue will be one new share for every two existing shares under Director A's proposal.
- E. The theoretical ex-rights price will be higher under Director B's proposal than under Director A's proposal.
Answer: A,B,D
NEW QUESTION 135
Company A is planning to acquire Company B at a price of $ 65 million by means of a cash bid.
Company A is confident that the merged entity can achieve the same price earnings ratio as that of Company A.
What does Company A expect the value of the merged entity to be post acquisition?
- A. $207.0 million
- B. $156.0 million
- C. $122.5 million
- D. $187.5 million
Answer: C
NEW QUESTION 136
Company H is considering the valuation of an unlisted company which it hopes to acquire.
It has obtained the target company's financial statements.
Company H has been advised that the book value of net assets as shown in the financial statements of the target company does not provide a reliable indicator of their true value.
Advise the Board of Directors which of the following THREE statements are disadvantages of the net asset basis of valuation?
- A. The net book value of assets is merely a record of past transactions which complies with accounting conventions.
- B. The net book value of assets can be obtained from the financial statements.
- C. The net book value of current assets is normally a reliable indicator of their realisable value.
- D. Intangible assets are often not shown in the company's financial statements.
- E. The net realisable value is usually different from the net book value shown in the financial statements.
Answer: A,D,E
NEW QUESTION 137
The competition authorities are investigating the takeover of Company Z by a larger company, Company
Y.
Both companies are food retailers.
The takeover terms involve using a part cash, part share exchange means of payment.
Company Z is resisting the bid, arguing that it undervalues its business, while lobbying extensively among politicians to sway public opinion against the bidder.
Which of the following actions by Company Y is most likely to persuade the competition authorities to approve the acquisition?
- A. Company Y undertakes to pass on any cost savings to customers.
- B. Company Y agrees to dispose of specified outlets which geographically overlap those of Company Z.
- C. Company Y guarantees to preserve employment at its cental distribution depot.
- D. Company Y increases the cash element of its bid offer.
Answer: B
NEW QUESTION 138
A company currently has a 6.25% fixed rate loan but it wishes to change the interest style of the loan to variable by using an interest rate swap directly with the bank.
The bank has quoted the following swap rate:
* 5.50% - 5.55% in exchange for LIBOR
LIBOR is currently 5%.
If the company enters into the swap and LIBOR remains at 5%, what will the company's interest cost be?
- A. 5.00%
- B. 5.70%
- C. 5.75%
- D. 6.25%
Answer: C
NEW QUESTION 139
Company P is a pharmaceutical company listed on an alternative investment market.
The company is developing a new drug which it hopes to market in approximately six years' time.
Company P is owned and managed by a group of doctors who wish to retain control of the company. The company operates from leased laboratories with minimal fixed assets.
Its value comes from the quality of its research staff and their research.
The company currently has one approved drug which generates sufficient cashflow to cover day to day operations but not sufficient for major new research and development.
Company P wish to raise debt finance to develop the new drug.
Recommend which of the following types of debt finance would be most appropriate for Company P to help finance the development of this new drug.
- A. 4% Convertible bond with a conversion ratio of 350 ordinary shares per bond.
- B. 6% Eurobond repayable at par in 5 years' time.
- C. 3% Commercial Paper.
- D. 5% Bond repayable at par in 7 years' time.
Answer: A
NEW QUESTION 140
A large multi-divisional company in the food processing and distribution business is conducting a strategic review. The divisions all compete in the same market.
The sale of one of its underperforming food processing divisions to the divisional management team is currently being considered. The purchase by the divisional management team will require venture capital finance.
Which THREE of the following are likely to influence the multi-divisional company's decision on whether or not to sell the under-performing division to the management team?
- A. The quality of the management team and its ability to manage the divested division successfully.
- B. The divisional management team has detailed confidential information about the operation of the other divisions.
- C. The ability of the management team to raise the finance required to complete the purchase of the division at a reasonable price.
- D. The specific conditions imposed on the management team by the venture capital provider.
- E. The divisional management team has skills and experience that are important for the future successful operation of other divisions.
Answer: B,C,E
NEW QUESTION 141
A company's latest accounts show profit after tax of $20.0 million, after deducting interest of $5.0 million. The company expects earnings to grow at 5% per annum indefinitely.
The company has estimated its cost of equity at 12%, which is included in the company WACC of 10%.
Assuming that profit after tax is equivalent to cash flows, what is the value of the equity capital?
Give your answer to the nearest $ million.
$ ? million
Answer:
Explanation:
300, 300000000
NEW QUESTION 142
Which of the following statements best describes a residual dividend policy?
- A. Dividends are paid only after the on-going operational needs of the business have been met.
- B. Dividends are paid at a constant rate.
- C. Dividends are paid only if no further positive NPV projects are available.
- D. All surplus earnings are invested back into the business.
Answer: C
NEW QUESTION 143
A listed company follows a policy of paying a constant dividend. The following information is available:
* Issued share capital (nominal value $0.50) $60 million
* Current market capitalisation $480 million
The shareholders are requesting an increased dividend this year as earnings have been growing. However, the directors wish to retain as much cash as possible to fund new investments. They therefore plan to announce a
1-for-10 scrip dividend to replace the usual cash dividend.
Assuming no other influence on share price, what is the expected share price following the scrip dividend?
Give your answer to 2 decimal places.
Answer:
Explanation:
$ ?
3.64, 3.63, 3.65
NEW QUESTION 144
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