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Introduction to CIMA F3: Financial Strategy Exam
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NEW QUESTION 127
Which THREE of the following long term changes are most likely to increase the credit rating of a company?
- A. A decrease in the (Book value of debt) / (Book value of equity) ratio.
- B. An increase in the interest cover ratio.
- C. A decrease in the dividend cover ratio.
- D. An increase in the free cashflow generated from operations.
- E. A decrease in the (Net debt) / (Earnings before interest, tax, depreciation and amortisation) ratio.
Answer: B,D,E
NEW QUESTION 128
Company X is based in Country A, whose currency is the A$.
It trades with customers in Country B, whose currency is the B$.
Company X aims to maintain its revenue from exports to Country B at 25% of total revenue.
Company A has the following forecast revenue:
The forecast revenue from Country B has assumed an exchange rate of A$1/B$2, that is A$1 = B$2.
If the B$ depreciates against the A$ by 10%, the ratio of revenue generated from Country B as a percentage of total revenue will:
- A. rise to 30.3%.
- B. rise to 27.0%.
- C. fall to 23.3%.
- D. fall to 22.7%.
Answer: C
NEW QUESTION 129
A company is financed as follows:
* 400 million $1 shares quoted at $3.00 each.
* $800 million 5% bonds quoted at par.
The company plans to raise $200 million long term debt to finance a project with a net present value of
$100 million.
The bank that is providing the debt is insisting on a maximum gearing level covenant.
Gearing will be based on market values and calculated as debt/(debt + equity).
What is the lowest figure for the gearing covenant that the bank could impose without the company breaching the agreement?
- A. 46%
- B. 44%
- C. 45%
- D. 43%
Answer: B
NEW QUESTION 130
A company raised fixed rate bank finance together with an interest rate swap for the same term and same principal value to pay floating receive fixed rate interest on an annual basis.
Which THREE of the following statements are correct?
- A. On the first day of this arrangement, the company receives the principal borrowed from the bank and pays this across to the swap counterparty.
- B. Under the swap, interest is exchanged every year.
- C. The company has effectively obtained floating rate debt.
- D. LIBID (London Interbank Bid Rate) is normally used as the reference rate for determining interest due under the swap.
- E. The swap contract is normally a contract between a company and a bank.
Answer: B,C,E
NEW QUESTION 131
A listed company has recently announced a profit warning.
The company's share price fell 20% on the day of the announcement but had been fairly static in the weeks leading up to the announcement.
Which form of efficient market is most likely to be indicated by this share price movement?
- A. Semi-strong form
- B. Random walk
- C. Weak form
- D. Strong form
Answer: A
NEW QUESTION 132
It is now 1 January 20X0.
Company V, a private equity company, is considering the acquisition of 40% of the equity of Company A for a total amount of $15 million.
Company A has been established to develop a new type of engine which will be launched at the end of 20X1.
Company A is forecasting that the new engine will result in free cash flows to equity of $2m in its first year of operation and that this will rise by 8% per year for the foreseeable future.
The new engine is the only commercial activity that Company A is involved in.
Company V intends to sell its stake in Company A when the new engine is launched.
Company A has a cost of equity of 12%.
Assuming that Company V receives an amount that reflects the present value of their shares in company A.
what is the estimated annual rate of return to Company V from this investment? (To the nearest %)
- A. 33%
- B. 10%
- C. 16%
- D. 3%
Answer: B
NEW QUESTION 133
A company has:
* A price/earnings (P/E) ratio of 10.
* Earnings of $10 million.
* A market equity value of $100 million.
The directors forecast that the company's P/E ratio will fall to 8 and earnings fall to $9 million.
Which of the following calculations gives the best estimate of new company equity value in $ million following such a change?
- A.
- B.
- C.
- D.
Answer: C
NEW QUESTION 134
A large, quoted company that is all-equity financed is planning to acquire a smaller unquoted company that is also all-equity financed.
The acquiring company's directors are using the dividend valuation model to value the target company before making an offer.
Relevant data for the target company:
* Dividends paid in the last financial year $2 million
* Book value of net assets $15 million
* Shares in issue 1 million
The acquiring company's cost of capital is 10%.
Its directors believe they can improve the target company's performance in the long term.
They estimate there will be no growth in the first year of the acquisition but from year 2 onwards there will be a 4% growth each year in perpetuity.
What is the maximum price the acquiring company should offer for each of the shares in the target company?
- A. $32.78
- B. $33.33
- C. $34.67
- D. $15.00
Answer: B
NEW QUESTION 135
A company is based in Country Y whose functional currency is Y$. It has an investment in Country Z whose functional currency is Z$.
This year the company expects to generate Z$ 10 million profit after tax.
Tax Regime:
* Corporate income tax rate in country Y is 50%
* Corporate income tax rate in country Z is 20%
* Full double tax relief is available
Assume an exchange rate of Y$ 1 = Z$ 5.
What is the expected profit after tax in Y$ if the Z$ profit is remitted to Country Y?
- A. Y$ 31.25 million
- B. Y$ 1.25 million
- C. Y$ 4.00 million
- D. Y$ 1.00 million
Answer: B
NEW QUESTION 136
Company J plans to acquire Company K, an unlisted company whose equity is to be valued using a P/E ratio approach.
A listed company has been identified which is very similar to Company K and which can be used as a proxy.
However, the growth prospects of Company K are higher than those of the proxy.
The Directors of Company J are aware that certain adjustments will be necessary to the proxy company's P/E ratio in order to obtain a more reliable valuation.
The following adjustments have been agreed:
* 20% due to Company K being unlisted.
* 15% to allow for the growth rate difference.
The total adjustment to the proxy p/e ratio is:
- A. 5% decrease
- B. 5% increase
- C. 35% decrease
- D. 35% increase
Answer: A
NEW QUESTION 137
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 138
Company B is an all equity financed company with a cost of equity of 10%.
It is considering issuing bonds in order to achieve a gearing level of 20% debt and 80% equity.
These bonds will pay a coupon rate of 5% and have an interest yield of 6%.
Company B pays corporate tax at the rate of 25%.
According to Modigliani and Miller's theory of capital structure with tax, what will be Company B's new cost of equity?
A)
B)
C)
D)
- A. Option B
- B. Option D
- C. Option C
- D. Option A
Answer: A
NEW QUESTION 139
Company A has made an offer to acquire Company Z.
Both companies are quoted and their current market share prices are:
* Company A - $4
* Company Z - $5
Shareholders in company Z have been given three alternative offers:
* Cash of $5.50 per share
* Share for share exchange on the basis of 3 for 2
* 10.5% long dated bond for every 20 shares
The bond is has a nominal value of $100 and the expected yield on bonds of similar risk is 10%.
You are advising a Company Z shareholder on the three offers.
She requires a 15% premium if she is to accept the offer.
In providing your advice, which of the following statements is correct?
- A. The share for share exchange is the only offer which is above the acceptance threshold.
- B. The bond offer is above the minimum threshold and should be accepted.
- C. The value of the consideration given by the cash and bond offers is certain, unlike the share offer.
- D. The bond offer is only worth $100 which represents a zero premium and should be rejected.
Answer: A
NEW QUESTION 140
A company's Board of Directors wishes to determine a range of values for its equity.
The following information is available:
Estimated net asset values (total asset less total liabilities including borrowings):
* Net book value = $20 million
* Net realisable value = $25 million
* Free cash flows to equity = $3.5 million each year indefinitely, post-tax.
* Cost of equity = 10%
* Weighted Average Cost of Capital = 7%
Advise the Board on reasonable minimum and maximum values for the equity.
- A. Minimum value = $20.0 million, and maximum value = $35.0 million
- B. Minimum value = $20.0 million, and maximum value = $50.0 million
- C. Minimum value = $25.0 million, and maximum value = $50.0 million
- D. Minimum value = $25.0 million, and maximum value = $35.0 million
Answer: D
NEW QUESTION 141
The following information relates to Company A's current capital structure:
Company A is considering a change in the capital structure that will increase gearing to 30:70 (Debt:Equity).
The risk -free rate is 3% and the return on the market portfolio is expected to be 10%.
The rate of corporate tax is 25%
Using the Capital Asset Pricing Model, calculate the cost of equity resulting from the proposed change to the capital structure.
- A. 9.3%
- B. 11.4%
- C. 12.3%
- D. 10.1%
Answer: C
NEW QUESTION 142
Which THREE of the following statements are correct?
- A. A portfolio can be diversified by increasing the number of securities in different industries held in the portfolio.
- B. The beta of a company's shares reflects systematic risk.
- C. The security market line (SML) shows the relationship between systematic risk and return.
- D. Systematic risk can be eliminated in a diversified portfolio.
- E. A beta of 1 indicates that the investment is risk free.
Answer: A,B,C
NEW QUESTION 143
Providers of debt finance often insist on covenants being entered into when providing debt finance for companies.
Agreement and adherence to the specific covenants is often a condition of the loan provided by the lender.
Which THREE of the following statements are true in respect of covenants?
- A. Covenants enable the lender to demand immediate repayment or to renegotiate terms if it is breached.
- B. Covenants are entered into to give the lender added protection on the loan extended to the company.
- C. Covenants are entered into to impose financial discipline on the company.
- D. Covenants are entered into to eliminate the tax liability of the company.
- E. Covenants are entered into to penalise the company.
Answer: A,B,C
Explanation:
Discursive_F0
NEW QUESTION 144
An unlisted company wishes to obtain an estimated value for its shares in anticipation of a private sale of a large parcel of shares.
Relevant data for the unlisted company:
* It has a residual dividend policy.
* It has earnings that are highly sensitive to underlying economic conditions.
* It is a small business in a large industry where there are listed companies but there are none with a similar capital structure.
The company intends to base valuations on the cost of equity of a proxy company after adjusting for any differences in capital structure where appropriate.
Which of the following methods is likely to give the most accurate equity value for this unlisted company?
- A. P/E based valuation using the P/E of a similar listed company in the same industry.
- B. Discounted cash flow analysis at WACC based on free cash flow to equity.
- C. Dividend valuation model.
- D. Net asset valuation.
Answer: C
NEW QUESTION 145
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 ratio should have been an average for companies in the same industry sector rather than alI listed companies
- B. The equity result needs to be uplifted in recognition that this is an unlisted company.
- C. Profit after tax should have been used in the calculation instead of profit before interest and tax.
- D. A forecast of sustainable profit should have been used instead of a historical figure
- E. The price-earnings valuation method gives a value for the entire entity not Just a value of the equity.
Answer: A,C,D
NEW QUESTION 146
An entity prepares financial statements to 30 June.
During the year ended 30 June 20X2 the following events occurred:
1 July 20X1
* The entitiy borrowed $100 million at a variable rate of interest.
* In order to protect itself against the variability of its interest cashflows, the entity entered into a pay- fixed-receive-variable interest swap with annual settlements. The fair value of the swap on this date was zero.
30 June 20X2
* The entity received a net settlement of $2 million under the swap. After this net settlement, the fair value of the swap was $5 million - a financial asset.
The entity decides to use hedge accounting for this arrangement and has designated it as a cash flow hedge. The swap is a perfect hedge of the variability of the cash interest payments.
Which of the following describes the treatment of the settlement and the change in the fair value of the swap in the statement of profit or loss and other comprehensive income for the year ended 30 June
20X2?
- A. $2 million is recognised in profit or loss and $5 million is recognised in other comprehensive income.
- B. $7 million is recognised in other comprehensive income.
- C. $7 million is recognised in profit or loss.
- D. $5 million is recognised in profit or loss and $2 million is recognised in other comprehensive income.
Answer: A
NEW QUESTION 147
......
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