100% Pass Top-selling F3 Exams - New 2022 CIMA Pratice Exam
CIMA Strategic level Dumps F3 Exam for Full Questions - Exam Study Guide
NEW QUESTION 68
A company's annual dividend has grown steadily at an annual rate of 3% for many years. It has a cost of equity of 11%. The share price is presently $64.38.
The company is about to announce its latest dividend, which is expected to be $5.00 per share.
The Board of Directors is considering an attractive investment opportunity that would have to be funded by reducing the dividend to $4.50 per share. The board expects the project to enable future dividends to grow by
5% every year and the cost of equity to remain unchanged.
Calculate the change in share price, assuming that the directors announce their intention to proceed with this investment opportunity.
Give your answer to 2 decimal places.
Answer:
Explanation:
$ ?
14.37
NEW QUESTION 69
The directors of a financial services company need to calculate a valuation of their company's equity in preparation for an upcoming initial Public Offering (IPO) of shares. At a recent board meeting they discussed the various methods of business valuation.
The Chief Executive suggested using a Price-earing (P./E) method of valuation, but the finance Director argued that a valuation based on forecast cash flows to equity would be more appropriate.
Which THREE of the following are advantages of valuation based on forecast cash flows to equity, compared to a valuating using a price earnings methods?
- A. It incorporates the time value of money.
- B. It avoids the problem of having to forecast a sustainable level of future growth.
- C. It give on estimate of the likely shareholder value that will be created.
- D. Using cash is theoretically superior to using profits in a valuation calculation.
- E. The calculations are much simpler.
Answer: A,D,E
NEW QUESTION 70
A company's annual dividend has grown steadily at an annual rate of 3% for many years. It has a cost of equity of 11%. The share price is presently $64.38.
The company is about to announce its latest dividend, which is expected to be $5.00 per share.
The Board of Directors is considering an attractive investment opportunity that would have to be funded by reducing the dividend to $4.50 per share. The board expects the project to enable future dividends to grow by
5% every year and the cost of equity to remain unchanged.
Calculate the change in share price, assuming that the directors announce their intention to proceed with this investment opportunity.
Give your answer to 2 decimal places.
$ ?
Answer:
Explanation:
14.37
NEW QUESTION 71
Assume today is 31 December 20X1.
A listed mobile phone company has just launched a new phone which is proving to be a great success.
As a direct result of the product's success, earnings are forecast to increase by:
* 5% a year in each of years 20X2 - 20X6
* 3% from 20X7 onwards
Market analysts were very excited to hear the news of the success of the product and future growth forecasts.
Assuming a semi-efficient market applies, which of the following company valuation methods is likely to give the best estimate of the company's equity value today?
- A. P/E valuation based on the company's long term P/E and earnings for the year ended 31 December
20X1. - B. Discounted free cash flow using the company's forecast growth rates.
- C. Today's share price x number of shares in issue + retained earnings.
- D. Today's share price x number of shares in issue.
Answer: D
NEW QUESTION 72
Company A plans to diversify by a cash acquisition of Company B an unlisted company in another country (Country B) which operates in a different industrial sector Company A already manufactures its product in Country B and has a loan denominated in Country B's currency Company A regularly suffers foreign exchange losses due to volatility in the exchange rate between the two countries' currencies in recent years.
Which THREE of the following appear to be be valid justifications of this diversification decision?
- A. The diversification will enable Company A to enjoy production scale economies
- B. The diversification will give Company A protection from political risk
- C. The diversification will give Company A greater protection from transaction risk.
- D. The diversification will give Company A greater protection from translation risk
- E. The diversification into another product market will lower business risk
Answer: B,C,D
NEW QUESTION 73
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 74
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 sell their entire rights entitlement there will be no impact on their wealth.
- B. If shareholders exercise their full rights 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 shareholders partially exercise their rights and sell the remaining rights entitlement there will be no impact on their wealth.
- E. If the shareholders only partially exercise their rights and allow the remainder to lapse there will be no impact on their wealth.
Answer: A,B,D
NEW QUESTION 75
A large multi-divisional company in the food processing and distribution business is conducting a strategic review. The divisions all compete in the same market.
The sale of one of its underperforming food processing divisions to the divisional management team is currently being considered. The purchase by the divisional management team will require venture capital finance.
Which THREE of the following are likely to influence the multi-divisional company's decision on whether or not to sell the under-performing division to the management team?
- A. The quality of the management team and its ability to manage the divested division successfully.
- B. The divisional management team has detailed confidential information about the operation of the other divisions.
- C. The ability of the management team to raise the finance required to complete the purchase of the division at a reasonable price.
- D. The specific conditions imposed on the management team by the venture capital provider.
- E. The divisional management team has skills and experience that are important for the future successful operation of other divisions.
Answer: B,C,E
NEW QUESTION 76
The Board of Directors of a listed company is considering the company's dividend/retentions policy.
The inflation rate in the economy is currently high and is expected to remain so for the foreseeable future.
The board are unsure what impact the high level of inflation might have on the dividend policy.
Which THREE of the following statements are true?
- A. The high inflation rate does not need to be considered when determining the dividend policy.
- B. Consideration should be given to the fact that shareholders will have a desire for real growth in dividend.
- C. The impact of inflation on the cash flows should be considered when formulating the dividend policy.
- D. Retained earnings for reinvestment will have to earn a return in excess of the inflation level.
- E. In periods of high inflation 100% of earnings should always be paid out as dividends so that shareholders can protect their wealth against the impact of inflation.
Answer: B,C,D
NEW QUESTION 77
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.
Answer:
Explanation:
$ ?
4.97, 4.98
NEW QUESTION 78
A company enters into a floating rate borrowing with interest due every 12 months over the five year life of the borrowing.
At the same time, the company arranges an interest rate swap to swap the interest profile on the borrowing from floating to fixed rate.
These transactions are designated as a hedge for hedge accounting purposes under IAS 39 Financial Instruments: Recognition and Measurement.
Assuming the hedge is considered to be effective, how would the swap be accounted for 12 months later?
- A. The swap would be shown at fair value the statement of financial position and the change in value posted to profit or loss.
- B. The swap would be shown at fair value the statement of financial position and the change in value posted to other comprehensive income.
- C. The swap would be shown at nominal value in the statement of financial position and the change in value posted to other comprehensive income.
- D. The swap would be shown at nominal value in the statement of financial position and the change in value posted to profit or loss.
Answer: B
NEW QUESTION 79
A new company was set up two years ago using the personal financial resources of the founders.
These funds were used to acquire suitable premises.
The company has entered into a long-term lease on the premises which are not yet fully fitted out.
The founders are considering requesting loan finance from the company's bank to fund the purchase of custom-made advanced technology equipment.
No other companies are using this type of equipment.
The company expects to continue to be profitable for the forseeable future.
It re-invests some of its surplus cash in on-going essential research and development.
Which THREE of the following features are likely to be considered negatives by the bank when assessing the company's credit-worthiness?
- A. The equipment is advanced technology custom-made equipment.
- B. The company premises are on a long-term lease but are not yet fully fitted out.
- C. Essential on-going research and development expenditure is required.
- D. The company will continue to remain profitable and to generate net cash.
- E. The founders invested their personal financial resources in the company.
Answer: A,B,C
NEW QUESTION 80
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 the reflects the gearing of the publishing company and the equity beta factor of the publishing company.
- B. A WACC that reflects the gearing of the subsidiary company and the asset beta of a listed company that provides training activities.
- C. A cost of equity that reflects the asset beta of a listed company that provides training activities.
- D. A WACC that reflects the gearing of the publishing company and the asset beta of a listed company that provides training activities.
Answer: D
NEW QUESTION 81
A listed company has recently announced a profit warning.
The company's share price fell 20% on the day of the announcement but had been fairly static in the weeks leading up to the announcement.
Which form of efficient market is most likely to be indicated by this share price movement?
- A. Semi-strong form
- B. Random walk
- C. Weak form
- D. Strong form
Answer: A
NEW QUESTION 82
A company intends to sell one of its business units, Company R by a management buyout (MBO).
A selling price of $100 million has been agreed.
The managers are discussing with a bank and a venture capital company (VCC) the following financing proposal:
The VCC requires a minimum return on its equity investment in the MBO of 30% a year on a compound basis over 5 years.
What is the minimum TOTAL equity value of Company R in 5 years time in order to meet the VCC's required return?
Give your answer to one decimal place.
$ ? million
Answer:
Explanation:
111.4, 111,
111.0, 111.1, 111.2,
111.3, 111.5, 111.6,
111.7
NEW QUESTION 83
Company A operates in country A with the AS as its functional currency. Company A expects to receive BS500.000 in 6 months' time from a customer in Country B which uses the B$.
Company A intends to hedge the currency risk using a money market hedge The following information is relevant:
What is the AS value of the BS expected receipt in 6 months' time under a money market hedge?
- A. AS31, 790
- B. AS32, 051
- C. AS31, 482
- D. AS32, 532
Answer: B
NEW QUESTION 84
Companies A, B, C and D:
* are based in a country that uses the K$ 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 B
- B. Company A
- C. Company C
- D. Company D
Answer: A
NEW QUESTION 85
Providers of debt finance often insist on covenants being entered into when providing debt finance for companies.
Agreement and adherence to the specific covenants is often a condition of the loan provided by the lender.
Which THREE of the following statements are true in respect of covenants?
- A. Covenants enable the lender to demand immediate repayment or to renegotiate terms if it is breached.
- B. Covenants are entered into to give the lender added protection on the loan extended to the company.
- C. Covenants are entered into to impose financial discipline on the company.
- D. Covenants are entered into to eliminate the tax liability of the company.
- E. Covenants are entered into to penalise the company.
Answer: A,B,C
Explanation:
Explanation
Discursive_F0
NEW QUESTION 86
Which three of the following are most likely be primary objectives for a newly established, unincorporated entity in the service sector?
- A. Reaching an optimum capital structure
- B. Providing consistently high levels service quality
- C. Increasing the dividend payment year on year
- D. Maintaining sufficient liquidity in the business to avoid overtrading
- E. Increasing Revenue
Answer: A,D,E
NEW QUESTION 87
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 88
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