CIMA F3 Financial Strategy - CIMAPRA19-F03-1 Exam Practice Test
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?
* 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?
Correct Answer: C
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?
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?
Correct Answer: C
Company A is planning to acquire Company B by means of a cash offer. The directors of Company B are prepared to recommend acceptance if a bid price can be agreed. Estimates of the net present value (NPV) of future cash flows for the two companies and the combined group post acquisition have been prepared by Company A's accountant. There are as follows:
What is the maximum price that Company A should offer for the shares in Company B?
Give your answer to the nearest $ million
What is the maximum price that Company A should offer for the shares in Company B?
Give your answer to the nearest $ million
Correct Answer:
150
The financial assistant of a geared company has prepared the following calculation of the company's equity value:
Useful information;
* Tax rate - 20%
* Cost of equity = 12%
* Weighted average cost of capital (WACC)= 10%
" Debt finance of the company comprises a $6 million 7% undated bond trading at par Valuation workings.
Which of the following errors has been made by the financial assistant?
Useful information;
* Tax rate - 20%
* Cost of equity = 12%
* Weighted average cost of capital (WACC)= 10%
" Debt finance of the company comprises a $6 million 7% undated bond trading at par Valuation workings.
Which of the following errors has been made by the financial assistant?
Correct Answer: A
An unlisted company which is owned and managed by its original founders has accumulated excess cash following many years of profitable trading.
The Board of Directors is comprised of the four original founders who each hold 25% of the equity share capital.
Which THREE of the following will be significant considerations when deciding on the company's dividend policy?
The Board of Directors is comprised of the four original founders who each hold 25% of the equity share capital.
Which THREE of the following will be significant considerations when deciding on the company's dividend policy?
Correct Answer: A,B,D
Which of the following statements about the tax impact on debt finance is correct?
Correct Answer: C
A company which is forecast to experience a strong growth in its profitability is evaluating a potential bond issue.
Which of the following changes in corporate income tax and in bond yields would make the bond issue more attractive to the company?
Which of the following changes in corporate income tax and in bond yields would make the bond issue more attractive to the company?
Correct Answer: D
A company is planning a share buyback. In which of the following circumstances would a share buyback be appropriate?
Correct Answer: D
A company has announced a rights issue of 1 new share for every 4 existing shares.
Relevant data:
* The current market price per share is $10.00.
* Rights are to be issued at a 20% discount to the current price.
* The rate of return on the new funds raised is expected to be 10%.
* The rate of return on existing funds is 5%.
What is the yield-adjusted theoretical ex-rights price?
Give your answer to two decimal places.
Relevant data:
* The current market price per share is $10.00.
* Rights are to be issued at a 20% discount to the current price.
* The rate of return on the new funds raised is expected to be 10%.
* The rate of return on existing funds is 5%.
What is the yield-adjusted theoretical ex-rights price?
Give your answer to two decimal places.
Correct Answer:
$ ?
11.20, 11.2
11.20, 11.2
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?
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?
Correct Answer: D
A venture capitalist is considering investing in a management buy-out that would be financed as follows:
* Equity from managers
* Equity from a venture capitalist
* Mezzanine debt finance from a venture capitalist
* Senior debt from a bank
The venture capitalist is planning to work with the management to grow the business in anticipation of an initial public offering within five years.
However, the cash forecast shows a potential shortage of funds in the first year and the venture capitalist is evaluating the potential impact of cash being generated in the first year being significantly lower than forecast.
The most important risk that a shortage of cash would create for the management buyout is that the new company has insufficient funds to:
* Equity from managers
* Equity from a venture capitalist
* Mezzanine debt finance from a venture capitalist
* Senior debt from a bank
The venture capitalist is planning to work with the management to grow the business in anticipation of an initial public offering within five years.
However, the cash forecast shows a potential shortage of funds in the first year and the venture capitalist is evaluating the potential impact of cash being generated in the first year being significantly lower than forecast.
The most important risk that a shortage of cash would create for the management buyout is that the new company has insufficient funds to:
Correct Answer: C