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NEW QUESTION 74
Company HJK is planning to bid for listed company BNM
Financial data for BNM for the financial year ended 31 December 20X1:
HJK is not forecasting any growth in these figures for the foreseeable future Profit and cost data above should be assumed to be equivalent to cash flow data when answenng this question Which THREE of the following approaches would be most appropriate for HJK to use to value the equity of BNM?
- A. Cash flows of S14 million discounted at the cost of equity
- B. Share price x number of shares in issue
- C. Share price x number of shares in issue plus retained profits
- D. Cash flows of S24 million discounted at the cost of equity
- E. Cash flows of $30 million (= S40 million net of tax at 25%) discounted at WACC minus the value of debt
Answer: B,C,E
NEW QUESTION 75
A geared and profitable company is evaluating the best method of financing the purchase of new machinery. It is considering either buying the machinery outright, financed by a secured bank borrowing and selling the machinery at the end of a fixed period of time or obtain the machinery under a lease for the same period of time.
Which is the correct discount rate to use when discounting the incremental cash flows of the lease against those of the buy and borrow alternative?
- A. The pre-tax cost of the bank borrowing
- B. The company's WACC.
- C. The post-tax cost of the bank borrowing
- D. The company's cost of equity
Answer: B
NEW QUESTION 76
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. Year 1 tax depreciation allowances of 100% are available in the foreign country.
- B. There are high customs duties payable on products entering the foreign country.
- C. The corporate tax rate in the foreign country is 40%.
- D. There are restrictions on companies wishing to remit profit from the foreign country.
- E. There is a double tax treaty between the company's domestic country and the foreign country.
Answer: A,B,E
NEW QUESTION 77
The Board of Directors of a listed company wish to estimate a reasonable valuation of the entire share capital of the company in the event of a takeover bid.
The company's current profit before taxation is $4.0 million.
The rate of corporate tax is 25%.
The average P/E multiple of listed companies in the same industry is 8 times current earnings.
The P/E multiple of recent takeovers in the same industry have ranged from 9 times to 10 times current earnings.
The average P/E multiple of the top 100 companies on the stock market is 15 times current earnings.
Advise the Board of Directors which of the following is a reasonable estimate of a range of values of the entire share capital in the event of a bid being made for the whole company?
- A. Minimum = $32 million, and maximum = $60 million.
- B. Minimum = $36 million, and maximum = $40 million.
- C. Minimum = $27 million, and maximum = $30 million.
- D. Minimum = $24 million, and maximum = $45 million.
Answer: C
NEW QUESTION 78
Select the category of risk for each of the descriptions below:
Answer:
Explanation:
NEW QUESTION 79
MAN is a manufacturing company that is based in country M and sells almost exclusively to customers in country M, priced in the local currency, M$.
MAN wishes to expand the business by acquiring a company that manufactures similar products but has a more global customer base. It is particularly interested in selling to customers in country P, which uses currency P$ but recognises that the P$ is generally quite volatile against the M$.
Country P uses the same language as country M, has free entry of labour from country M, no exchange controls or withholding tax and a favourable double tax treaty.
Which of the following companies would be most suitable takeover candidates for MAN to investigate further?
- A. A company based in country M with a shared interest in selling in country P.
- B. A company based in country P with a global customer base including country P.
- C. A company based in country P with a large proportion of customers in country M.
- D. A company based in country M with a global customer base including country P.
Answer: B
NEW QUESTION 80
A company is concerned that a high proportion of its debt portfolio consists of variable rate finance with an interest rate of LIBOR ' 1 .0%.
It is considering using an interest rate swap to reduce interest rate risk out is concerned about additional finance cost this might create.
A bank has quoted swap rates of 3% 3.5% against LIBOR.
A bank has quoted swap rates of 3% 3.5% against LIBOR.
Is an interest rate swap likely to be beneficial to the company at current LIBOR rates?
- A. Yes, because it will have lower interest rate risk and interest cost remains the same.
- B. No, because interest cost will increase with the interest rate swap in place.
- C. No, because it would be cheaper to repay variable rate finance aid enter into new fixed rate finance than to enter into an interest rate swap.
- D. Yes, because interest cost will decrease with the interest rate swap in place.
Answer: A
NEW QUESTION 81
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 82
A company has in a 5% corporate bond in issue on which there are two loan covenants.
* Interest cover must not fall below 3 times
* Retained earnings for the year must not fall below $3.5 million
The Company has 200 million shares in issue.
The most recent dividend per share was $0.04.
The Company intends increasing dividends by 10% next year.
Financial projections for next year are as follows:
Advise the Board of Directors which of the following will be the status of compliance with the loan covenants next year?
- A. The company will be in breach of both covenants.
- B. The company will breach the covenant in respect of retained earnings only.
- C. The company will be in compliance with both covenants.
- D. The company will be in breach of the covenant in respect of interest cover only.
Answer: B
NEW QUESTION 83
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. Focus on the core competencies of the business
- C. Avoid a hostile reaction from key management.
- D. Retain the know edge of key management.
Answer: C
NEW QUESTION 84
A company plans to cut its dividend but is concerned that the share price will fall.
This demonstrates the _____________ effect
Answer:
Explanation:
clientele
NEW QUESTION 85
Company C has received an unwelcome takeover bid from Company P.
Company P is approximately twice the size of Company C based on market capitalisation.
Although the two companies have some common business interests, the main aim of the bid is diversification for Company P.
The offer from Company P is a share exchange of 2 shares in Company P for 3 shares in Company C.
There is a cash alternative of $5.50 for each Company C share.
Company C has substantial cash balances which the directors were planning to use to fund an acquisition.
These plans have not been announced to the market.
The following share price information is relevant. All prices are in $.
Which of the following would be the most appropriate action by Company C's directors following receipt of this hostile bid?
- A. Pay a one-off special dividend.
- B. Write to shareholders explaining fully why the company's share price is under valued.
- C. Change the Articles of Association to increase the percentage of shareholder votes required to approve a takeover.
- D. Refer the bid to the country's competition authorities.
Answer: B
NEW QUESTION 86
An unlisted company:
* Is owned by the original founder and member of their families.
* Is growing more rapidly than other companies in the same industry.
* Pays a fixed annual divided
Which of the following methods would be the most appropriate to value this company's equity?
- A. Discounted cash flow analysis based on forecast future free cash flows.
- B. Asset based approach including intangibles.
- C. Divided valuation method.
- D. P/E ratio of a listed company in the same industry.
Answer: A
NEW QUESTION 87
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 cost of debt remain unchanged at 4%
- B. The cost of debt will increase above 4%
- C. The WACC increase above 7.6
- D. The cost of equity will increase above 10%
- E. The WACC will decrease below 7.6%
- F. The cost of equity will decrease below 10%
Answer: C,E
NEW QUESTION 88
Which THREE of the following are considered in detail in IFRS 7 Financial Instruments: Disclosures?
- A. Enterprise risk
- B. Credit risk
- C. Business risk
- D. Market risk
- E. Liquidity risk
Answer: B,D,E
NEW QUESTION 89
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. $65.0 million
- B. $41.6 million
- C. $50.2 million
- D. $32.0 million
Answer: B
NEW QUESTION 90
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 91
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 $2.00 per Kilowatt.
The company expects this to cause consumption to rise by 15% but costs would remained unaltered.
The price cap is expected to cause the company's net profit to fall to:
- A. $126.50 million loss
- B. $43.00 million profit
- C. $164.00 million profit
- D. $8.75 million profit
Answer: C
NEW QUESTION 92
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. $65.0 million
- B. $41.6 million
- C. $50.2 million
- D. $32.0 million
Answer: B
NEW QUESTION 93
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 fall to 9.3%.
- C. It will rise to 11.2%.
- D. It will rise to 10.3%.
Answer: A
NEW QUESTION 94
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Topics of the CIMA F3: Financial Strategy Exam
CIMA F3 exam dumps included the following topics:
- Financial policy decisions 15%
- Sources of long-term funds 25%
- Financial risks 20%
- Business valuation 40%
Cost of the CIMA F3: Financial Strategy Exam
The cost of the CIMA F3: Financial Strategy Exam is 300 US Dollars.
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