cima cimapra19 f03 1 practice test
F3 Financial Strategy
Question 1
A listed company is planning to raise $21.6 million to finance a new project with a positive
net present value of $5 million. The finance is to be raised via a rights issue at a 10% discount to the
current share price. There are currently 100 million shares in issue, trading at $2.00 each.
Taking the new project into account, what would the theoretical ex-rights price be?
Give your answer to two decimal places.
$ ?
- A. 2.02, 2.03
- B. 2.02, 1.03
Answer:
A
Question 2
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.
$ ? million
- A. 8, 8000000
- B. 7, 8000000
Answer:
A
Question 3
Which THREE of the following remain unchanged over the life of a 10 year fixed rate bond?
- A. The coupon rate
- B. The yield
- C. The market value
- D. The nominal value
- E. The amount payable on maturity
Answer:
A, D, E
Question 4
On 31 October 20X3:
• A company expected to agree a foreign currency transaction in January 20X4 for settlement on 31
March 20X4.
•
The
company hedged the
currency
risk using a
forward contract at
nil
cost for
settlement on 31 March 20X4.
• The transaction was correctly treated as a cash flow hedge in accordance with IAS 39 Financial
Instruments: Recognition and Measurement.
On 31 December 20X3, the financial year end, the fair value of the forward contract was $10,000
(asset).
How should the increase in the fair value of the forward contract be treated within the financial
statements for the year ended 31 December 20X3?
- A. Not recognised in 20X3 as the forward contract is not settled until after the year end.
- B. Not recognised in 20X3 as the gain will be offset by a loss on the hedged transaction.
- C. A $10,000 profit will be recognised within the Income Statement.
- D. A $10,000 profit will be recognised within other comprehensive income.
Answer:
D
Question 5
A company is funded by:
• $40 million of debt (market value)
• $60 million of equity (market value)
The company plans to:
• Issue a bond and use the funds raised to buy back shares at their current market value.
• Structure the deal so that the market value of debt becomes equal to the market value of equity.
According to Modigliani and Miller's theory with tax and assuming a corporate income tax rate of
20%, this plan would:
- A. increase the company's asset beta.
- B. decrease the company's equity beta.
- C. increase shareholder wealth.
- D. increase the market value of the company's equity.
Answer:
C
Question 6
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 theoretical ex-rights price will be higher under Director B's proposal than under Director A's proposal.
- B. More shares will be issued under Director B's proposal than under Director A's proposal.
- C. The rights issue price will be $3.00 under Director A'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. Shareholder wealth will be higher under Director A's proposal than under Director B's proposal.
Answer:
B, C, D
Question 7
A wholly equity financed company has the following objectives:
1. Increase in profit before interest and tax by at least 10% per year.
2. Maintain a dividend payout ratio of 40% of earnings per year.
Relevant data:
• There are 2 million shares in issue.
• Profit before interest and tax in the last financial year was $5 million.
• The corporate income tax rate is 30%.
At the beginning of the current financial year, the company raised long term debt of $2 million at
10% interest each year.
Calculate the dividend per share that will be announced this year assuming the company achieves its
objective of increasing profit before interest and tax by 10%.
- A. $0.74
- B. $0.67
- C. $1.11
- D. $1.01
Answer:
A
Question 8
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. The relative lack of marketability of unlisted company shares.
- B. A lower level of scrutiny and regulation for unlisted companies.
- C. Unlisted companies being generally smaller and less established.
- D. Control premium not being included within the proxy p/e ratio used.
- E. The forecast earnings growth being relatively higher in the unlisted company.
- F. A profit item within the unlisted company's latest earnings which will not reoccur.
Answer:
A, B, C
Question 9
Company A, a listed company, plans to acquire Company T, which is also listed.
Additional information is:
• Company A has 100 million shares in issue, with market price currently at $8.00 per share.
• Company T has 90 million shares in issue,. with market price currently at $5.00 each share.
• Synergies valued at $60 million are expected to arise from the acquisition.
• The terms of the offer will be 2 shares in A for 3 shares in B.
Assuming the offer is accepted and the synergies are realised, what should the post-acquisition price
of each of Company A's shares be?
Give your answer to two decimal places.
$ ? .
- A. 8.19, 8.18
- B. 8.19, 6.18
Answer:
A
Question 10
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. 43%
- B. 44%
- C. 45%
- D. 46%
Answer:
B
Question 11
A company is planning to repurchase some of its shares. Relevant details are as follows:
• 100 million shares in issue
• Current share price $5
• 5 million shares to be repurchased
• 10% repurchase premium
• Repurchased shares to be cancelled
What would you expect the share price after the repurchase to be?
Give your answer to two decimal places.
$ ?
- A. 4.97, 4.98
- B. 4.97, 3.98
Answer:
A
Question 12
Hospital X provides free healthcare to all members of the community, funded by the central
Government.
Hospital Y provides healthcare which has to be paid for by the individual patients. It is a listed
company, owned by a large number of shareholders.
In comparing the above two organisations and their objectives, which THREE of the following
statements are correct?
- A. X is a not-for-profit organisation while Y is a for-profit organisation.
- B. X and Y have the same primary financial objective - to maximise shareholder wealth.
- C. The performance of X will be appraised primarily on the basis of value for money.
- D. Only Y is likely to have a mixture of financial and non-financial objectives.
- E. X and Y will have the same primary non financial objective - provision of quality of health care.
Answer:
E
Question 13
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 A
- B. Company B
- C. Company C
- D. Company D
Answer:
B
Question 14
A company has a cash surplus which it wishes to distribute to shareholders by a share repurchase
rather than paying a special dividend.
Which THREE of the following statements are correct?
- A. The payment of a special dividend could raise shareholders' expectations of similar distributions in the future, unlike a share repurchase.
- B. The share repurchase could send a negative signal to shareholders as it could be interpreted as a failure of management to find suitable investment opportunities.
- C. Determination of the repurchase price will be easy as shareholders will insist on receiving the open market price.
- D. Different tax regimes could result in shareholders having a preference for a share repurchase due to the often more preferential tax treatment of capital gains.
- E. The share repurchase, if approved by the shareholders, will be binding on all of the company's shareholders.
Answer:
A, B, D
Question 15
A company's gearing (measured as debt/(debt + equity)) is currently 60% and it is investigating
whether an optimal gearing structure exists within the industry.
It has analysed the capital structure of similar companies in the industry and it would appear that
there is evidence supporting the traditional theory of capital structure.
Companies with the lowest WACC in the industry have gearing of around 45% to 50%.
Which of the following actions would result in the company achieving a more optimal capital
structure?
- A. Undertaking a rights issue of equity to repay some of its debt.
- B. Refinancing to replace some of its short term debt with long term debt.
- C. Increasing the level of dividend to return more cash to shareholders.
- D. Using retained cash to undertake a buyback of some of its equity.
Answer:
A