Nov 28, 2021 Step by Step Guide to Prepare for F3 Exam BrainDumps
CIMA Strategic level F3 Real Exam Questions and Answers FREE Updated on 2021
NEW QUESTION 74
A company has accumulated a significant amount of excess cash which is not required for investment for the foreseeable future.
It is currently on deposit, earning negligible returns.
The Board of Directors is considering returning this excess cash to shareholders using a share repurchase programme.
The majority of shareholders are individuals with small shareholdings.
Which THREE of the following are advantages of the company undertaking a share repurchase programme?
- A. It reduces excess cash which might have been attractive to predators.
- B. Individual shareholders can realise their investment if they wish.
- C. Institutional investors generally prefer a constant predictable income in the form of dividends.
- D. It reduces the amount of cash for potential future investment opportunities.
- E. The earnings per share should increase for the shareholders who do not sell their shares.
Answer: A,B,E
NEW QUESTION 75
The table below shows the forecast for a company's next financial year:
The forecast incorporates the following assumptions:
* 25% of operating costs are variable
* Debt finance comprises a $400 million fixed rate loan at 5%
* Corporate income tax is paid at 25%
The company plans to do the following next year from the forecast earnings on the assumption that earnings will be equivalent to free cash flow:
* Pay a total dividend of $20 million
* Invest $40 million in new projects
What is the maximum % reduction in operating activity that could occur next year before the company's dividend and investment plans are affected?
Give your answer to the nearest 0.1%.
Answer:
Explanation:
4.8, 4.7, 4.9, 5.0, 4.6, 4.80, 4.70, 4.90, 5.00, 4.60%
NEW QUESTION 76
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
Answer:
Explanation:
150
NEW QUESTION 77
Company A plans to acquire Company B, an unlisted company which has been in business for 3 years.
It has incurred losses in its first 3 years but is expected to become highly profitable in the near future.
No listed companies in the country operate the same business field as Company B, a unique new high- risk business process.
The future success of the process and hence the future growth rate in earnings and dividends is difficult to determine.
Company A is assessing the validity of using the dividend growth method to value Company B.
Which THREE of the following are weaknesses of using the dividend growth model to value an unlisted company such as Company B?
- A. The future projected dividend stream is used as the basis for the valuation.
- B. The dividend growth model does not take the time value of money into consideration.
- C. The cost of capital will be difficult to estimate.
- D. The company has been unprofitable to date and hence, there is no established dividend payment pattern.
- E. The future growth rate in earnings and dividends will be difficult to accurately determine.
Answer: C,D,E
NEW QUESTION 78
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. $50.2 million
- C. $65.0 million
- D. $41.6 million
Answer: D
NEW QUESTION 79
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 25 existing shares
- B. 1 new share for every 4 existing shares
- C. 1 new share for every 20 existing shares
- D. 1 new share for every 5 existing shares
Answer: B
NEW QUESTION 80
A company is undertaking a lease-or-buy evaluation, using the post-tax cost of bank borrowing as the discount rate.
Details of the two alternatives are as follows:
Buy option:
* To be financed by a bank loan
* Tax depreciation allowances are available on a reducing-balance basis
* Assets depreciated on a straight-line basis
Lease option:
* Finance lease
* Maintenance to be paid by the lessee
* Tax relief available on interest payments and book depreciation
Which THREE of the following are relevant cashflows in the lease-or-buy appraisal?
- A. Maintenance payments
- B. Lease payments
- C. Bank loan payments
- D. Tax relief on the book depreciation
- E. Tax relief on tax depreciation allowances
Answer: B,D,E
NEW QUESTION 81
On 1 January 20X1, a company had:
* Cost of equity of 10 0%.
* Cost of debt of 5.0%
* Debt of $100Mmilion
* 100 million $1 shares trading at $4.00 each.
On 1 February 20X1:
* The company's share police fell to $3.00.
* Debt and the cost of debt remained unchanged
The company does not pay tax.
Under Modigliani and Miller's theory without lax. what is the best estimate of the movement in the cost of equity as a result of the fall in ne share price?
- A. It will stay the same at 10.0%.
- B. It will rise to 11.2%.
- C. It will rise to 10.3%.
- D. It will fall to 9.3%.
Answer: A
NEW QUESTION 82
A company generates and distributes electricity and gas to households and businesses.
Forecast results for the next financial year are as follows:
The Industry Regulator has announced a new price cap of $1.50 per Kilowatt.
The company expects this to cause consumption to rise by 10% but costs would remained unaltered.
The price cap is expected to cause the company's net profit to fall to:
- A. $35.0 million loss
- B. $27.5 million profit
- C. $47.5 million profit
- D. $20.0 million profit
Answer: C
NEW QUESTION 83
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. $117.6
- B. $112.0
- C. $100.0
- D. $129.6
Answer: D
NEW QUESTION 84
A venture capitalist invests in a company by means of buying:
* 9 million shares for $2 a share and
* 8% bonds with a nominal value of $2 million, repayable at par in 3 years' time.
The venture capitalist expects a return on the equity portion of the investment of at least 20% a year on a compound basis over the first 3 years of the investment.
The company has 10 million shares in issue.
What is the minimum total equity value for the company in 3 years' time required to satisify the venture capitalist's expected return?
Give your answer to the nearest $ million.
$ million.
Answer:
Explanation:
34, 35, 34000000, 35000000
NEW QUESTION 85
A company is wholly equity funded. It has the following relevant data:
* Dividend just paid $4 million
* Dividend growth rate is constant at 5%
* The risk free rate is 4%
* The market premium is 7%
* The company's equity beta factor is 1.2
Calculate the value of the company using the Dividend Growth Model.
Give your answer in $ million to 2 decimal places.
Answer:
Explanation:
$ ? million
56.76, 56.75
NEW QUESTION 86
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. 12.3%
- C. 10.1%
- D. 11.4%
Answer: B
NEW QUESTION 87
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 88
Company A is proposing a rights issue to finance a new investment. Its current debt to equity ratio is 10%.
Which TWO of the following statements are true?
- A. Company A's current low gearing ratio may require a rights issue rather than a debt issue to finance the new project.
- B. The issue price of new shares should be set to guarantee the full take up of shares offered.
- C. According to Modigliani and Miller's Theory of Capital Structure with tax, the rights issue will result in a lower cost of equity for Company A.
- D. The actual ex-rights price may be higher than the theoretical ex-rights price due to the value created from the project.
- E. The issue price has to be at least 20% below the pre-rights share price.
Answer: C,D
NEW QUESTION 89
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 90
A company has a covenant on its 5% long-term bond, stipulating that its retained earnings must not fall below $2 million.
The company has 100 million shares in issue.
Its most recent dividend was $0.045 per share. It has committed to grow the dividend per share by 4% each year.
The nominal value of the bond is $60 million. It is currently trading at 80% of its nominal value.
Next year's earnings before interest and taxation are projected to be $11.25 million.
The rate of corporate tax is 20%.
If the company increases the dividend by 4%, advise the Board of Directors if the level of retained earnings will comply with the covenant?
- A. Covenant is breached as retained earnings = $1.92 million.
- B. The covenant is not breached as retained earnings = $4.68 million.
- C. Covenant is not breached as retained earnings = $2.40 million.
- D. Covenant is not breached as retained earnings = $2.10 million.
Answer: A
NEW QUESTION 91
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 bond offer is above the minimum threshold and should be accepted.
- B. The share for share exchange is the only offer which is above the acceptance threshold.
- C. The bond offer is only worth $100 which represents a zero premium and should be rejected.
- D. The value of the consideration given by the cash and bond offers is certain, unlike the share offer.
Answer: B
NEW QUESTION 92
A UK based company is considering investing GBP1 ,000,000 in a project it the USA. It is anticipated that the project will yield net cash inflows of USD580.000 each year for the next three years. These surplus cash flows will be remitted to the UK at the end of each year.
Currently GBP1.00 is worth USD1.30.
The expected inflation rates in the two countries ever the next four years are 2% in the UK and 4% in the USA.
Applying the purchasing power parity theory, which of the following represents the expected remittance at the end of year three, in GBP whole the nearest whole GBP)?
- A. GBP472,916
- B. GBP546,547
- C. GBP450,906
- D. GBP568,846
Answer: C
NEW QUESTION 93
An unlisted company is attempting to value its equity using the dividend valuation model.
Relevant information is as follows:
* A dividend of $500,000 has just been paid.
* Dividend growth of 8% is expected for the foreseeable future.
* Earnings growth of 6% is expected for the foreseeable future.
* The cost of equity of a proxy listed company is 15%.
* The risk premium required due to the company being unlisted is 3%.
The calculation that has been performed is as follows:
Equity value = $540,000 / (0.18 - 0.08) = $5,400,000
What is the fault with the calculation that has been performed?
- A. The dividend growth rate is unsuitable given that earning growth is lower than dividend growth.
- B. The cost of equity used in the calculation should have been 12% (15% subtract 3%).
- C. The dividend cashflow used should have been $500,000 rather than $540,000.
- D. The cost of equity used in the calculation should have been 15%; no adjustment was necessary.
Answer: A
NEW QUESTION 94
If a company's bonds are currently yielding 8% in the marketplace, why would the entity's cost of debt be lower than this?
- A. Market interest rates have decreased.
- B. Interest is deductible for tax purposes.
- C. There should be no difference; the cost of debt is the same as the bond's market yield.
- D. The company's credit rating has changed.
Answer: B
NEW QUESTION 95
An aerospace company is planning to diversify into car manufacturing.
Relevant data:
What is the the cost of equity to be used in the WACC for the project appraisal?
Give your answer in percentage, as a whole number.
? %
Answer:
Explanation:
19
NEW QUESTION 96
A company is considering either exporting its product directly to customers in a foreign country or establishing a manufacturing subsidiary in that country.
The corporate tax rate in the company's own country is 20% and 25% tax depreciation allowances are available.
Which THREE of the following would be considered advantages of establishing the subsidiary in the foreign country?
- A. There is a double tax treaty between the company's domestic country and the foreign country.
- B. There are high customs duties payable on products entering the foreign country.
- C. There are restrictions on companies wishing to remit profit from the foreign country.
- D. Year 1 tax depreciation allowances of 100% are available in the foreign country.
- E. The corporate tax rate in the foreign country is 40%.
Answer: A,B,D
NEW QUESTION 97
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. Revalue non-current assets
- D. Approach a White Knight
Answer: D
NEW QUESTION 98
Company A plans to acquire a minority stake in Company B.
The last available share price for Company B was $0.60.
Relevant data about Company B is as follows:
* A dividend per share of $0.08 has just been paid
* Dividend growth is expected to be 2%
* Earnings growth is expected to be 4%
* The cost of equity is 15%
* The weighted average cost of capital is 13%
Using the dividend growth model, what would be the expected change in share price?
- A. $0.16 increase
- B. $0.03 increase
- C. $0.14 increase
- D. $0.07 fall
Answer: B
NEW QUESTION 99
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