Practice CIMA Strategic level F3 exam. Online Exam Practice Tests with detailed explanations! Pass F3 with confidence!
F3 - Financial Strategy Practice Tests 2021 | CramPDF
NEW QUESTION 65
The Board of Directors of a listed company have decided that it needs to increase its equity capital to ensure it is in a more stable financial position.
The shareholder profile is a mix of institutional and individual small shareholders.
The board is considering either:
* A scrip dividend
* A zero dividend
Which THREE of the following would be considered disadvantages of a scrip dividend compared to a zero dividend?
- A. A scrip dividend results in distributable reserves being moved to non-distributable reserves.
- B. A scrip dividend results in more shares in issue which will create an expectation for future dividends.
- C. A scrip issue may give shareholders the impression that they are receiving something of value.
- D. There will be company secretarial and additional administration involved with a scrip dividend.
- E. A scrip dividend will dilute the control of current shareholders.
Answer: A,B,D
NEW QUESTION 66
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 = $36 million, and maximum = $40 million.
- B. Minimum = $32 million, and maximum = $60 million.
- C. Minimum = $27 million, and maximum = $30 million.
- D. Minimum = $24 million, and maximum = $45 million.
Answer: C
NEW QUESTION 67
The directors of a unlisted manufacturing company have prepared a valuation of their company using the price-earning method.
Their calculation is:
Value if the company's equity = $6 million x 10 =$60 million where.
* $6 million is the company's reported profit before interested and tax in the most recent accounting period and
* 10 is the average price-earnings ratio for all listed companies
Which THREE of the following are weakness of this valuation?
- A. The price-earnings valuation method gives a value for the entire entity not Just a value of the equity.
- B. Profit after tax should have been used in the calculation instead of profit before interest and tax.
- C. A forecast of sustainable profit should have been used instead of a historical figure
- D. The equity result needs to be uplifted in recognition that this is an unlisted company.
- E. The price-earnings ratio should have been an average for companies in the same industry sector rather than alI listed companies
Answer: B,C,E
NEW QUESTION 68
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. Using cash is theoretically superior to using profits in a valuation calculation.
- B. It avoids the problem of having to forecast a sustainable level of future growth.
- C. The calculations are much simpler.
- D. It give on estimate of the likely shareholder value that will be created.
- E. It incorporates the time value of money.
Answer: A,C,E
NEW QUESTION 69
A company has a covenant on its 5% long term corporate bond.
* Covenant - The earnings must not fall below $7 million
The bond has a nominal value of $60 million.
It is currently trading at 80% of its nominal value.
The projected earnings before interest and taxation for next year are $11.5 million.
The company retains 80% of its earnings. It pays tax at 20%.
Advise the Board of Directors which of the following covenant conditions will apply next year?
- A. The earnings will be = $5.44 million (The covenant will be breached).
- B. The earnings will be = $11.50 million (The covenant will not be breached).
- C. The earnings will be = $7.28 million (The covenant will not be breached).
- D. The earnings will be = $6.80 million (The covenant will be breached).
Answer: D
NEW QUESTION 70
Company P is a pharmaceutical company listed on an alternative investment market.
The company is developing a new drug which it hopes to market in approximately six years' time.
Company P is owned and managed by a group of doctors who wish to retain control of the company. The company operates from leased laboratories with minimal fixed assets.
Its value comes from the quality of its research staff and their research.
The company currently has one approved drug which generates sufficient cashflow to cover day to day operations but not sufficient for major new research and development.
Company P wish to raise debt finance to develop the new drug.
Recommend which of the following types of debt finance would be most appropriate for Company P to help finance the development of this new drug.
- A. 5% Bond repayable at par in 7 years' time.
- B. 6% Eurobond repayable at par in 5 years' time.
- C. 3% Commercial Paper.
- D. 4% Convertible bond with a conversion ratio of 350 ordinary shares per bond.
Answer: D
NEW QUESTION 71
A company plans to acquire new machinery.
It has two financing options; buy outright using a bank loan, or a finance lease.
Which of the following is an advantage of a finance lease compared with a bank loan?
- A. It is "off-balance sheet" and will not affect the company's gearing.
- B. The lessor provides maintenance of the asset.
- C. The interest rate offered might be more favourable because the lessor has the security of the asset.
- D. Tax depreciation allowances may be passed on to the company by the lessor.
Answer: C
NEW QUESTION 72
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 73
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 global customer base including country P.
- B. A company based in country P with a large proportion of customers in country M.
- C. A company based in country P with a global customer base including country P.
- D. A company based in country M with a shared interest in selling in country P.
Answer: C
NEW QUESTION 74
For which THREE of the following risk categories does IFRS 7 require sensitivity analysis?
- A. Currency risk
- B. Interest rate risk
- C. Supply chain risk
- D. Liquidity risk
- E. Commodity risk
- F. Credit risk
Answer: A,B,E
NEW QUESTION 75
Which of the following statements about IFRS 7 Financial Instruments: Disclosures is true?
- A. The main requirement of IFRS 7 is for qualitative disclosures relating to financial instruments and market risks.
- B. IFRS 7 only applies to entities that are designated as financial institutions by a regulatory authority.
- C. IFRS 7 requires sensitivity analysis in relation to credit risk.
- D. IFRS 7 requires disclosures to be given for each separate class of financial instruments.
Answer: D
NEW QUESTION 76
Company W has received an unwelcome takeover bid from Company B.
The offer is a share exchange of 3 shares in Company B for 5 shares in Company W or a cash alternative of $5.70 for each Company W share.
Company B is approximately twice the size of Company W based on market capitalisation. Although the two companies have some common business interested the main aim of the bid is diversification for Company B.
Company W 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.
Which of the following would be the most appropriate action by Company W's directors following receipt of this hostile bid?
- A. Write to shareholders explaining fully why the company's share price is under valued.
- B. Change the Articles of Association to increase the percentage of shareholder votes required to approve a takeover.
- C. Pay a one-off special dividend.
- D. Refer the bid to the country's competition authorities.
Answer: A
NEW QUESTION 77
Which THREE of the following long term changes are most likely to increase the credit rating of a company?
- A. An increase in the free cashflow generated from operations.
- B. An increase in the interest cover ratio.
- C. A decrease in the (Book value of debt) / (Book value of equity) ratio.
- D. A decrease in the dividend cover ratio.
- E. A decrease in the (Net debt) / (Earnings before interest, tax, depreciation and amortisation) ratio.
Answer: A,B,E
NEW QUESTION 78
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 only worth $100 which represents a zero premium and should be rejected.
- B. The value of the consideration given by the cash and bond offers is certain, unlike the share offer.
- C. The bond offer is above the minimum threshold and should be accepted.
- D. The share for share exchange is the only offer which is above the acceptance threshold.
Answer: D
NEW QUESTION 79
An all equity financed company reported earnings for the year ending 31 December 20X1 of $5 million.
One of its financial objectives is to increase earnings by 5% each year.
In the year ending 31 December 20X2 it financed a project by issuing a bond with a $1 million nominal value and a coupon rate of 7%.
The company pays corporate income tax at 30%.
If the company is to achieve its earnings target for the year ending 31 December 20X2, what is the minimum operating profit (profit before interest and tax) that it must achieve?
- A. $7.57 million
- B. $8.40 million
- C. $7.50 million
- D. $5.25 million
Answer: A
NEW QUESTION 80
Companies A, B, C and D:
* are based in a country that uses the K$ 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 D
- C. Company C
- D. Company B
Answer: D
NEW QUESTION 81
Company A, a listed company, plans to acquire Company T, which is also listed.
Additional information is:
* Company A has 150 million shares in issue, with market price currently at $7.00 per share.
* Company T has 120 million shares in issue,. with market price currently at $6.00 each share.
* Synergies valued at $50 million are expected to arise from the acquisition.
* The terms of the offer will be 2 shares in A for 3 shares in T.
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.
Answer:
Explanation:
8.24
NEW QUESTION 82
A company is considering either directly exporting its product to customers in a foreign country or setting up a subsidiary in the foreign country to manufacture and supply customers in that country.
Details of each alternative method of supplying the foreign market are as follows:
There is an import tax on product entering the foreign country of 10% of sales value.
This import duty is a tax-allowable deduction in the company's domestic country.
The exchange rate is A$1.00 = B$1.10
Which alternative yields the highest total profit after taxation?
- A. Domestic: A$41,250
- B. Foreign subsidiary: A$35,000
- C. Foreign subsidiary: A$38,500
- D. Domestic: A$33,750
Answer: B
NEW QUESTION 83
Company X plans to acquire Company Y.
Pre-acquisition information:
Post-acquisition information:
Total combined earnings are expected to increase by 10%
Total combined P/E multiple will remain at 10 times
Which of the following share-for-share exchanges will result in an increase of 10% in Company X's share price post-acquisition?
- A. 3 shares in Company X for 5 shares in Company Y
- B. 1 share in Company X for 2.75 shares in Company Y
- C. 1 share in Company X for 2 shares in Company Y
- D. 2 shares in Company X for 1 shares in Company Y
Answer: A
NEW QUESTION 84
A company is based in Country Y whose functional currency is Y$. It has an investment in Country Z whose functional currency is Z$.
This year the company expects to generate Z$ 10 million profit after tax.
Tax Regime:
* Corporate income tax rate in country Y is 50%
* Corporate income tax rate in country Z is 20%
* Full double tax relief is available
Assume an exchange rate of Y$ 1 = Z$ 5.
What is the expected profit after tax in Y$ if the Z$ profit is remitted to Country Y?
- A. Y$ 1.25 million
- B. Y$ 1.00 million
- C. Y$ 4.00 million
- D. Y$ 31.25 million
Answer: A
NEW QUESTION 85
Company A has made an offer to take over all the shares in Company B on the following terms:
* For every 20 shares currently held, Company B's shareholders will receive $100 bond with a coupon rate of 3%
* The bond will be repaid in 10 years' time at its par value of $100.
* The current yield on 10 year bonds of similar risk is 6%.
What is the effective offer price per share being made to Company B's shareholders?
- A. $6.43
- B. $6.89
- C. $3.89
- D. $4.50
Answer: C
NEW QUESTION 86
A company's gearing is well below its optimal level and therefore it is considering implementing a share re-purchase programme.
This programme will be funded from the proceeds of a planned new long-term bond issue.
Its financial projections show no change to next year's expected earnings.
As a result, the company plans to pay the same total dividend in future years.
If the share re-purchase is implemented, which THREE of the following measures are most likely to decrease?
- A. The number of shares in issue
- B. The cost of equity
- C. Next year's dividend per share
- D. The gearing, based on book value (debt ÷ (debt + equity))
- E. The interest cover
- F. The Weighted Average Cost of Capital
Answer: A,E,F
NEW QUESTION 87
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