Best Quality F3 Exam Questions CIMA Test To Gain Brilliante Result!
Preparations of F3 Exam 2021 CIMA Strategic level Unlimited 255 Questions
NEW QUESTION 115
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 116
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: B
NEW QUESTION 117
Company M's current profit before interest and taxation is $5.0 million.
It has a long-term 10% corporate bond in issue with a nominal value of $10 million.
The rate of corporate tax is 25%.
It plans to continue to pay out 50% of its earnings in dividends and earnings are expected to grow by 3% each year in perpetuity.
Its cost of equity is 10%.
Using the dividend growth model, advise the Board of Directors of Company M which of the following provide a reasonable valuation of Company M's equity?
- A. $50.1 million
- B. $22.1 million
- C. $44.1 million
- D. $73.6 million
Answer: B
NEW QUESTION 118
A company's statement of financial position includes non-current assets which are leased, the tax regime follows the accounting treatment.
Which cash flows should be discounted when evaluating the cost of lease finance?
- A. Lease payments, tax relief on implied interest and tax relief on straight-line account depreciation.
- B. Lease payments, implied interested and straight-line accounting deprediation.
- C. Lease payments and straight-line accounting depreciation.
- D. Lease payments and implied interest.
Answer: C
NEW QUESTION 119
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. $1,260 million
- B. $834 million
- C. $966 million
- D. $889 million
Answer: C
NEW QUESTION 120
A listed publishing company owns a subsidiary company whose business activity is training.
It wishes to dispose of the subsidiary company.
The following information is available:
The board of the publishing company believe that the value of the subsidiary company, and hence the value of the equity invested in it, can be determined by calculating the present value of the subsidiary's free cashflows.
Which of the following is the most appropriate discount rate to use when determining the enterprise value of the company?
- A. A WACC that reflects the gearing of the publishing company and the asset beta of a listed company that provides training activities.
- B. A cost of equity that reflects the asset beta of a listed company that provides training activities.
- C. A WACC that reflects the gearing of the subsidiary company and the asset beta of a listed company that provides training activities.
- D. A WACC that the reflects the gearing of the publishing company and the equity beta factor of the publishing company.
Answer: A
NEW QUESTION 121
When valuing an unlisted company, a P/E ratio for a similar listed company may be used but adjustments to the P/E ratio may be necessary.
Which THREE of the following factors would justify a reduction in the proxy p/e ratio before use?
- A. A lower level of scrutiny and regulation for unlisted companies.
- B. Control premium not being included within the proxy p/e ratio used.
- C. The relative lack of marketability of unlisted company shares.
- D. The forecast earnings growth being relatively higher in the unlisted company.
- E. A profit item within the unlisted company's latest earnings which will not reoccur.
- F. Unlisted companies being generally smaller and less established.
Answer: A,C,F
NEW QUESTION 122
Company X is based in Country A, whose currency is the A$.
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. fall to 23.3%.
- B. rise to 27.0%.
- C. fall to 22.7%.
- D. rise to 30.3%.
Answer: A
NEW QUESTION 123
AA is considering changing its capital structure. The following information is currently relevant to AA:
The gearing rating raising the new debt finance will be 50%.
Which THREE of the following statement about the impact of AA's change in capital structure are true under Modigliani and Miler's capital structure theory with tax.
- A. The WACC will decrease below 7.6%
- B. The cost of equity will decrease below 10%
- C. The WACC increase above 7.6
- D. The cost of debt remain unchanged at 4%
- E. The cost of debt will increase above 4%
- F. The cost of equity will increase above 10%
Answer: A,C
NEW QUESTION 124
A company has an opportunity to invest in a positive net present value project, but the project would require debt finance that would push the company's gearing ever a limit imposed by a debt covenant on an existing loan.
Which THREE of the following actions could be taken by the company?
- A. The company could seek alternative sources of finding, such as a reduction in the annual dividend payment, to finance the project.
- B. The directors could proceed will the project because their primary duly is maximise shared older wealth, even if that conflicts with lenders' interest.
- C. The directors could meet with key shareholder to discuss whether they wish the project proceed despite the breach of the covenant
- D. The project could proceed if the cash inflows from the project will enable some of the debt to be repaid before the end of the financial year and so the breach of covenant may never be detected
- E. The project could be foregone if it cannot be funded without breaching the covenant
- F. The company could approach its existing Lenders to negotiate a relaxation of :he conditions imposed by the covenant.
Answer: A,E,F
NEW QUESTION 125
A company is deciding whether to offer a scrip dividend or a cash dividend to its shareholders.
Although the company has excellent long-term growth prospects, it is experiencing short-term profit and cash flow problems.
Which of the following statements is most likely to be a reason for choosing the scrip dividend?
- A. It is a way of increasing earnings per share.
- B. It is a way of encouraging shareholders to allow cash to be retained in the business.
- C. It is a way of increasing dividend per share.
- D. It is a way of raising additional finance to promote future growth.
Answer: B
NEW QUESTION 126
Select the category of risk for each of the descriptions below:
Answer:
Explanation:
NEW QUESTION 127
An all equity financed company reported earnings for the year ending 31 December 20X1 of $8 million.
One of its financial objectives is to increase earnings by 5% each year.
In the year ending 31 December 20X2 it financed a project by issuing a bond with a $1 million nominal value and a coupon rate of 4%.
The company pays corporate income tax at 20%.
If the company is to achieve its earnings target for the year ending 31 December 20X2, what is the minimum operating profit (profit before interest and tax) that it must achieve?
- A. $10.50 million
- B. $6.69 million
- C. $10.54 million
- D. $8.40 million
Answer: C
NEW QUESTION 128
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 129
A listed company in a high growth industry, where innovation is a key driver of success has always operated a residual dividend policy, resulting in volatility in dividends due to periodic significant investments in research and development.
The company has recently come under pressure from some investors to change its dividend policy so that shareholders receive a consistent growing dividend. In addition, they suggested that the company should use more debt finance.
If the suggested change is made to the financial policies, which THREE of the following statements are true?
- A. The company's financial risk will increase due to its increased use of debt finance.
- B. Retained earnings have a lower cost than debt finance.
- C. There may be a change to the shareholder profile due to 'the clientele effect'.
- D. It may give a signal to the market that the company is entering a period of stable growth.
- E. The directors will not have to take shareholder dividend preferences into consideration in future.
Answer: A,C,D
NEW QUESTION 130
The directors of a multinational group have decided to sell off a loss-making subsidiary and are considering the following methods of divestment:
1. Trade sale to an external buyer
2. A management buyout (MBC)
The MDO team and the external buyer have both offered the same price to the parent company for the subsidiary.
Which of the following is an advantage to the parent company of opting for a MBO compared to a trade sale as the preferred method of divestment?
- A. Raise the cash more quickly.
- B. Retain the know edge of key management.
- C. Avoid a hostile reaction from key management.
- D. Focus on the core competencies of the business
Answer: C
NEW QUESTION 131
The Board of Directors of Company T is considering a rights issue to fund a new investment opportunity which has a zero NPV.
The Board of Directors wishes to explain to shareholders what the theoretical impact on their wealth will be as a result of different possible actions during the rights issue.
Which THREE of the following statements in respect of theoretical shareholder wealth are true?
- A. If shareholders exercise their full rights there will be no impact on their wealth.
- B. If shareholders sell their entire rights entitlement there will be no impact on their wealth.
- C. If the shareholders allow their rights to lapse (do nothing) there will be no impact on their wealth.
- D. If the shareholders only partially exercise their rights and allow the remainder to lapse there will be no impact on their wealth.
- E. If shareholders partially exercise their rights and sell the remaining rights entitlement there will be no impact on their wealth.
Answer: A,B,E
NEW QUESTION 132
CI IJ has decided to move its production plant to overseas country X.
This would make the product cheaper to produce.
The technology used to make the product is very advanced and some of the skilled staff would have to move to country X.
The Production Director has identified that there are some political risks in moving to county X.
For each of the political risks of moving to country X shown below, select the correct method for reducing the risk.
Answer:
Explanation:
NEW QUESTION 133
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 increases the cash element of its bid offer.
- 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 undertakes to pass on any cost savings to customers.
Answer: B
NEW QUESTION 134
Company S is planning to acquire Company T.
The shareholders in Company T will receive new shares in Company S in an all-share consideration.
Relevant information:
The shareholders in Company T want sufficient shares to receive a 25% premium on the pre-acquisition value of their shares, based on the pre-acquisition share price.
Which of the following share-for-share offers will achieve the desired result?
- A. 1 share in Company S for 1 share in Company T
- B. 1 share in Company S for 2 shares in Company T
- C. 10 shares in Company S for 4 shares in Company T
- D. 2 shares in Company S for 1 share in Company T
Answer: A
NEW QUESTION 135
Extracts from a company's profit forecast for the next financial year as follows:
Since preparing the forecast, the company has decided to return surplus cash to shareholders by a share repurchase arrangement.
The share repurchase would result in the company purchasing 20% of the 1,250 million ordinary shares currently in issue and canceling them.
Assuming the share repurchase went ahead, the impact on the company's forecast earnings per share will be an increase of:
- A. $0.175
- B. $0.125
- C. $0.100
- D. $0.200
Answer: C
NEW QUESTION 136
A company has a loss-making division that it has decided to divest in order to raise cash for other parts of the business.
The losses stem from a combination of a lack of capital investment and poor divisional management.
The loss-making division would require new capital investment of at least $20 million in order to replace worn out and obsolete assets.
If this investment was carried out, the present value of the future cashflows, excluding the investment expenditure, is expected to be $15 million.
Which TWO of the following divestment methods are most likely to be suitable for the company?
- A. Trade sale
- B. Spin-off
- C. Liquidation
- D. De-merger
- E. Management buy-out
Answer: A,C
NEW QUESTION 137
The International Integrated Reporting Council (IIRC) was formed in August 2010 and brings together a cross-section of representatives from a wide variety of business sectors.
The primary purpose of the IIRC's framework is to help enable an organsation to communicate how it:
- A. ensures that the conflicting needs of different stakeholder groups are met in an optimal manner.
- B. minimises the environmental impact of its business processes.
- C. contributes positively to the economic well being of the environment in which it operates.
- D. creates value in the short, medium and long term.
Answer: D
NEW QUESTION 138
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