[Sep 17, 2021] Latest F3 Exam with Accurate Financial Strategy PDF Questions
Practice To F3 - PracticeVCE Remarkable Practice On your Financial Strategy Exam
NEW QUESTION 76
A new company was set up two years ago using the personal financial resources of the founders.
These funds were used to acquire suitable premises.
The company has entered into a long-term lease on the premises which are not yet fully fitted out.
The founders are considering requesting loan finance from the company's bank to fund the purchase of custom-made advanced technology equipment.
No other companies are using this type of equipment.
The company expects to continue to be profitable for the forseeable future.
It re-invests some of its surplus cash in on-going essential research and development.
Which THREE of the following features are likely to be considered negatives by the bank when assessing the company's credit-worthiness?
- A. Essential on-going research and development expenditure is required.
- B. The company will continue to remain profitable and to generate net cash.
- C. The equipment is advanced technology custom-made equipment.
- D. The company premises are on a long-term lease but are not yet fully fitted out.
- E. The founders invested their personal financial resources in the company.
Answer: A,C,D
NEW QUESTION 77
A company has just received a hostile bid. Which of the following response strategies could be considered?
- A. Poison pill strategy
- B. Change the Articles of Association to amend voting rights
- C. Approach a White Knight
- D. Revalue non-current assets
Answer: C
NEW QUESTION 78
A company proposes to value itself based on the net present value of estimated future cash flows.
Relevant data:
* The cash flow for the next three years is expected to be £100 million each year
* The cash flow after year 3 will grow at 2% to perpetuity
* The cost of capital is 12%
The value of the company to the nearest $ million is:
- A. $889 million
- B. $1,260 million
- C. $966 million
- D. $834 million
Answer: C
NEW QUESTION 79
A company plans to acquire new machinery.
It has two financing options; buy outright using a bank loan, or a finance lease.
Which of the following is an advantage of a finance lease compared with a bank loan?
- A. It is "off-balance sheet" and will not affect the company's gearing.
- B. The lessor provides maintenance of the asset.
- C. The interest rate offered might be more favourable because the lessor has the security of the asset.
- D. Tax depreciation allowances may be passed on to the company by the lessor.
Answer: C
NEW QUESTION 80
The directors of a unlisted manufacturing company have prepared a valuation of their company using the price-earning method.
Their calculation is:
Value if the company's equity = $6 million x 10 =$60 million where.
* $6 million is the company's reported profit before interested and tax in the most recent accounting period and
* 10 is the average price-earnings ratio for all listed companies
Which THREE of the following are weakness of this valuation?
- A. The price-earnings valuation method gives a value for the entire entity not Just a value of the equity.
- B. Profit after tax should have been used in the calculation instead of profit before interest and tax.
- C. A forecast of sustainable profit should have been used instead of a historical figure
- D. The equity result needs to be uplifted in recognition that this is an unlisted company.
- E. The price-earnings ratio should have been an average for companies in the same industry sector rather than alI listed companies
Answer: B,C,E
NEW QUESTION 81
B has a S3 million loan outstanding on which the interested rate is reset every 6 months for the following 6 month and the interested is payable at the end of that 6 month period. The next 6 monthly reset period starts in
3 months and the treasurer of B thinks interested rates are likely to raise between and then.
Current 6-month rates are 6.4% and the treasurer can get a rate of 6.9% for a 6-month forward rate agreement (FRA) starting in 3 months time. By transacting an TRA the treasurer can lock in a rate today of 6.9%.
If interested rates are 7.5% in 3 months' time, what will the net amount payable be?
Give your answer to the nearest thousand dollars.
Answer:
Explanation:
104
NEW QUESTION 82
A company's annual dividend has grown steadily at an annual rate of 3% for many years. It has a cost of equity of 11%. The share price is presently $64.38.
The company is about to announce its latest dividend, which is expected to be $5.00 per share.
The Board of Directors is considering an attractive investment opportunity that would have to be funded by reducing the dividend to $4.50 per share. The board expects the project to enable future dividends to grow by 5% every year and the cost of equity to remain unchanged.
Calculate the change in share price, assuming that the directors announce their intention to proceed with this investment opportunity.
Give your answer to 2 decimal places.
$ ?
Answer:
Explanation:
14.37
NEW QUESTION 83
Using the CAPM, the expected return for a company is 10%. The market return is 7% and the risk free rate is
1%.
What does the beta factor used in this calculation indicate about the risk of the company?
- A. It has the same risk as the average market risk.
- B. It has greater risk than the average market risk.
- C. It is not possible to tell from CAPM.
- D. It has lower risk than the average market risk.
Answer: B
NEW QUESTION 84
Company A is planning to acquire Company B.
Company A's managers think they can improve the performance of Company B to the extent that its own P/E ratio should be applied to Company B's earnings.
Relevant Data:
What is the expected synergy if the acquisition goes ahead?
Give your answer to the nearest $ million.
Answer:
Explanation:
$ ? million
8, 8000000
NEW QUESTION 85
A company generates operating profit of $17.2 million, and incurs finance costs of $5.7 million.
It plans to increase interest cover to a multiple of 5-to-1 by raising funds from shareholders to repay some existing debt. The pre-tax cost of debt is fixed at 5%, and the refinancing will not affect this.
Assuming no change in operating profit, what amount must be raised from shareholders?
Give your answer in $ millions to the nearest one decimal place.
Answer:
Explanation:
$ ?
45.2
NEW QUESTION 86
A company has forecast the following results for the next financial year:
The following is also relevant:
* Profit after tax for the year can be assumed to be equivalent to free cash flow for the year.
* Debt finance comprises a $10 million floating rate loan which currently carries an interest rate of 5%.
* $400,000 investment in non-current assets is required to achieve required growth, all of which is to financed from next year's free cash flow.
* The company plans to pay a dividend of $150,000 next year, financed from next year's free cash flow.
The company is concerned that interest rates could rise next year to 6% which could then affect their investment plans.
If interest rates were to rise to 6% and the company wishes to maintain its dividend amount, the planned investment expenditure will decrease by:
- A. $75,000
- B. $100,000
- C. $50,000
- D. $25,000
Answer: D
NEW QUESTION 87
Company A needs to raise AS500 mi lion to invest in a new project and is considering using a pub ic issue of bonds to finance the investment.
Which THREE of the following statements-relating to this bond issue are true?
- A. Purchasing bonds in the capital markets enables entities to borrow large amounts of finance.
- B. A company must be listed before it can issue bones.
- C. Bonds issues in the corporate debt market are underwritten.
- D. The largest issuer of bond i3 the government.
- E. The bond market is unregulated making it easier to raise finance
Answer: A,B,D
NEW QUESTION 88
A company is in the process of issuing a 10 year $100 million bond and is considering using an interest rate swap to change the interest profile on some or all of the $100 million new finance.
The company has a target fixed versus floating rate debt profile of 1:1. Before issuing the bond its debt profile was as follows:
Which of the following is the most appropriate interest rate swap structure for the company?
- A. Pay fixed receive floating interest rate swap for $100 million.
- B. Receive fixed pay floating interest rate swap for $50 million.
- C. Pay fixed receive floating interest rate swap for $50 million.
- D. Receive fixed pay floating interest rate swap for $100 million.
Answer: B
NEW QUESTION 89
Company Y plans to diversify into an activity where Company X has an equity beta of 1.6, a debt beta of zero and gearing of 50% (debt/debt plus equity).
The risk-free rate of return is 5% and the market portfolio is expected to return 10%.
The rate of corporate income tax is 30%.
What would be the risk-adjusted cost of equity if Company Y has 60% equity and 40% debt?
- A. 9.1%
- B. 13%
- C. 11.6%
- D. 11.9%
Answer: D
NEW QUESTION 90
Company R is a major food retailer. It wishes to acquire Company S, a food manufacturer.
Company S currently supplies many stores owned by Company R with food products that it manufactures.
Company S is of similar size to Company R but has a lower credit rating.
Which of the following is most likely to be a synergistic benefit to R on purchasing S?
- A. Lower cost of borrowing due to the acquistion of a company with a different credit rating.
- B. Cost savings due to reducing the range of products manufactured by Company S.
- C. Savings due to a reduction in purchase costs and more control over the value chain.
- D. Reduced competition resulting in the ability to raise retail selling prices for food products.
Answer: C
NEW QUESTION 91
A company needs to raise $40 million to finance a project. It has decided on a right issue at a discount of 20% to its current market share price.
There are currently 20 million shares in issue with a nominal value of $1 and a market price of $10.00 per share.
- A. 1 new share for every 4 existing shares
- B. 1 new share for every 20 existing shares
- C. 1 new share for every 5 existing shares
- D. 1 new share for every 25 existing shares
Answer: A
NEW QUESTION 92
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. 10.0%
- B. 8.0%
- C. 9.4%
- D. 11.0%
Answer: D
NEW QUESTION 93
A company has 8% convertible bonds in issue. The bonds are convertible in 3 years time at a ratio of 20 ordinary shares per $100 nominal value bond.
Each share:
* has a current market value of $5.60
* is expected to grow at 5% each year
What is the expected conversion value of each $100 nominal value bond in 3 years' time?
- A. $112.0
- B. $100.0
- C. $117.6
- D. $129.6
Answer: D
NEW QUESTION 94
A company's Board of Directors is considering raising a long-term bank loan incorporating a number of covenants.
The Board members are unsure what loan covenants involve.
Which THREE of the following statements regarding loan covenants are true?
- A. A covenant gives the financial institution the right but not the obligation to convert debt into equity in a case of non-compliance.
- B. A positive loan covenant would require the company to undertake specific actions.
- C. A loan covenant has no contractually binding obligations.
- D. A restrictive covenant prohibits the company from conducting certain actions without the approval of the lending institution.
- E. A financial covenant usually requires the company to adhere to specific financial conditions or targets.
Answer: B,D,E
NEW QUESTION 95
A company wishes to raise new finance using a rights issue to invest in a new project offering an IRR of
10%
The following data applies:
* There are currently 1 million shares in issue at a current market value of $4 each.
* The terms of the rights issue will be $3.50 for 1 new share for 5 existing shares.
* The company's WACC is currently 8%.
What is the yield-adjusted theoretical ex-rights price (TERP)?
Give your answer to 2 decimal places.
$ ?
Answer:
Explanation:
4.06, 4.060
NEW QUESTION 96
Company T is a listed company in the retail sector.
Its current profit before interest and taxation is $5 million.
This level of profit is forecast to be maintainable in future.
Company T has a 10% corporate bond in issue with a nominal value of $10 million.
This currently trades at 90% of its nominal value.
Corporate tax is paid at 20%.
The following information is available:
Which of the following is a reasonable expectation of the equity value in the event of an attempted takeover?
- A. $32.0 million
- B. $41.6 million
- C. $65.0 million
- D. $50.2 million
Answer: B
NEW QUESTION 97
A company wishes to raise additional debt finance and is assessing the impact this will have on key ratios.
The following data currently applies:
* Profit before interest and tax for the current year is $500,000
* Long term debt of $300,000 at a fixed interest rate of 5%
* 250,000 shares in issue with a share price of $8
The company plans to borrow an additional $200,000 on the first day of the year to invest in new project which will improve annual profit before interest and tax by $24,000.
The additional debt would carry an interest rate of 3%.
Assume the number of shares in issue remain constant but the share price will increase to $8.50 after the investment.
The rate of corporate income tax is 30%.
After the investment, which of the following statements is correct?
- A. Interest cover will rise; P/E ratio will rise.
- B. Interest cover will rise; P/E ratio will fall.
- C. Interest cover will fall; P/E ratio will fall.
- D. Interest cover will fall; P/E ratio will rise.
Answer: D
NEW QUESTION 98
Select the most appropriate divided for each of the following statements:
Answer:
Explanation:
NEW QUESTION 99
A company has a covenant on its 5% long term corporate bond.
* Covenant - The earnings must not fall below $7 million
The bond has a nominal value of $60 million.
It is currently trading at 80% of its nominal value.
The projected earnings before interest and taxation for next year are $11.5 million.
The company retains 80% of its earnings. It pays tax at 20%.
Advise the Board of Directors which of the following covenant conditions will apply next year?
- A. The earnings will be = $5.44 million (The covenant will be breached).
- B. The earnings will be = $11.50 million (The covenant will not be breached).
- C. The earnings will be = $7.28 million (The covenant will not be breached).
- D. The earnings will be = $6.80 million (The covenant will be breached).
Answer: D
NEW QUESTION 100
An unlisted software development company has recently reported disappointing results. This was partly due to weak economic conditions but also because of its poor competitive position. The company has a number of exciting development opportunities which would enable it to achieve significant future growth. The company's growth potential has been hindered by its inability to secure sufficient new finance.
To enable the company raise new finance the Directors are considering working forwards an IPO in 10 years and accepting finance from a venture capitalist in order support in the intervening period.
The directors are keen to retain a controlling stake in the company and full representation on the board. They therefore require venture capitalists to provide funds as a mix of debt and equity and not soley equity finance.
Which THREE of the following are most likely to disrupt the directors' plans to use venture capital finance?
- A. Venture capitalists normally expect an exit strategy sconer than the planned IPO in 10 years'time.
- B. Venture capitalists normally expect at least one seat on the board.
- C. Venture capitalists always require ownership of more than 50% of the shares in a company to ensure control.
- D. Venture capitalists only provide equity finance and will therefore not be interested in providing a combination of debt and equity finance.
- E. The venture capital finance offered is much more expensive than expected.
Answer: A,B,E
NEW QUESTION 101
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