CIMA F3 Practice Verified Answers - Pass Your Exams For Sure! [2021]
Valid Way To Pass CIMA Strategic level's F3 Exam
NEW QUESTION 94
Company A is unlisted and all-equity financed. It is trying to estimate its cost of equity.
The following information relates to another company, Company B, which operates in the same industry as Company A and has similar business risk:
Equity beta = 1.6
Debt:equity ratio 40:60
The rate of corporate income tax is 20%.
The expected premium on the market portfolio is 7% and the risk-free rate is 5%.
What is the estimated cost of equity for Company A?
Give your answer to one decimal place.
Answer:
Explanation:
? %
12.3, 12.30
NEW QUESTION 95
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 96
A company needs to raise $20 million to finance a project.
It has decided on a rights 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 $5 per share.
Calculate the terms of the rights issue.
- A. 1 new share for every 4 existing shares
- B. 1 new share for every 20 existing shares
- C. 1 new share for every 5 existing shares
- D. 1 new share for every 25 existing shares
Answer: A
Explanation:
Explanation
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NEW QUESTION 97
Which THREE of the following remain unchanged over the life of a 10 year fixed rate bond?
- A. The yield
- B. The market value
- C. The amount payable on maturity
- D. The nominal value
- E. The coupon rate
Answer: C,D,E
NEW QUESTION 98
A company's Board of Directors wishes to determine a range of values for its equity.
The following information is available:
Estimated net asset values (total asset less total liabilities including borrowings):
* Net book value = $20 million
* Net realisable value = $25 million
* Free cash flows to equity = $3.5 million each year indefinitely, post-tax.
* Cost of equity = 10%
* Weighted Average Cost of Capital = 7%
Advise the Board on reasonable minimum and maximum values for the equity.
- A. Minimum value = $25.0 million, and maximum value = $35.0 million
- B. Minimum value = $25.0 million, and maximum value = $50.0 million
- C. Minimum value = $20.0 million, and maximum value = $35.0 million
- D. Minimum value = $20.0 million, and maximum value = $50.0 million
Answer: A
NEW QUESTION 99
KKL is a listed sports clothing company with three separate business units. KKL is seeking to sell TT', one of these business units TTP cwns a new. brand of trail running shoes that have Droved hugely popular with lone distance runners.
The management team of TTP are frustrated by the constraints imposes b/ KKL in managing tie brand and developing. the bus ness and they believe that TTF has huge growth potential.
The management team of TTP have approached KKL with a proposal to purchase 1~P through a management layout (MDO). KKL has accepted this proposal as TTP has not proved to be a good fit' with the rest of the business and has agreed on the selling price.
Which THREE of the following factors a-e mast Likely to affect the success of the MBO?
- A. The constraints imposed by KKL managing TTF's brand.
- B. The ability the TTP management team to develop the brand and achieve the expected growth.
- C. Searing sufficient. funding for the MBO.
- D. The motivation of the TTP management team to invest in future growth.
- E. The ability of the TTF management team to take over the head office functions successfully.
Answer: B,C,E
NEW QUESTION 100
Company B is an all equity financed company with a cost of equity of 10%.
It is considering issuing bonds in order to achieve a gearing level of 20% debt and 80% equity.
These bonds will pay a coupon rate of 5% and have an interest yield of 6%.
Company B pays corporate tax at the rate of 25%.
According to Modigliani and Miller's theory of capital structure with tax, what will be Company B's new cost of equity?
- A.
- B.
- C.
- D.
Answer: D
NEW QUESTION 101
A listed company is financed by debt and equity.
If it increases the proportion of debt in its capital structure it would be in danger of breaching a debt covenant imposed by one of its lenders.
The following data is relevant:
The company now requires $800 million additional funding for a major expansion programme.
Which of the following is the most appropriate as a source of finance for this expansion programme?
- A. Private placement of a bond
- B. Rights issue
- C. Retained earnings
- D. Bank overdraft
Answer: B
NEW QUESTION 102
Which THREE of the following are considered in detail in IFRS 7 Financial Instruments: Disclosures?
- A. Credit risk
- B. Market risk
- C. Business risk
- D. Enterprise risk
- E. Liquidity risk
Answer: A,B,E
NEW QUESTION 103
A listed company is financed by debt and equity.
If it increases the proportion of debt in its capital structure it would be in danger of breaching a debt covenant imposed by one of its lenders.
The following data is relevant:
The company now requires $800 million additional funding for a major expansion programme.
Which of the following is the most appropriate as a source of finance for this expansion programme?
- A. Private placement of a bond
- B. Rights issue
- C. Retained earnings
- D. Bank overdraft
Answer: B
NEW QUESTION 104
A company's statement of financial position includes non-current assets which are leased, the tax regime follows the accounting treatment.
Which cash flows should be discounted when evaluating the cost of lease finance?
- A. Lease payments, implied interested and straight-line accounting deprediation.
- B. Lease payments, tax relief on implied interest and tax relief on straight-line account depreciation.
- C. Lease payments and straight-line accounting depreciation.
- D. Lease payments and implied interest.
Answer: C
NEW QUESTION 105
A company is planning to issue a 5 year $100 million bond at a fixed rate of 6%.
It is also considering whether or not to enter into a 10 year $100 million swap to receive 5% fixed and pay Libor + 1% once a year.
The company predicts that Libor will be 4% over the life of the 5 years.
What is the impact of the swap on the company's annual interest cost assuming that the Libor prediction is correct?
- A. Remain the same.
- B. Increase by 1%.
- C. Fall by 2%.
- D. Fall by 1%.
Answer: A
NEW QUESTION 106
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 107
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 108
Company A has a cash surplus.
The discount rate used for a typical project is the company's weighted average cost of capital of 10%.
No investment projects will be available for at least 2 years.
Which of the following is currently most likely to increase shareholder wealth in respect of the surplus cash?
- A. Maintaining the cash in a current account.
- B. Paying the surplus cash as a dividend at the earliest opportunity.
- C. Investing in a 2 year bond returning 5% each year.
- D. Investing in the local money market at 4% each year.
Answer: B
Explanation:
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NEW QUESTION 109
A company has a loss-making division that it has decided to divest in order to raise cash for other parts of the business.
The losses stem from a combination of a lack of capital investment and poor divisional management.
The loss-making division would require new capital investment of at least $20 million in order to replace worn out and obsolete assets.
If this investment was carried out, the present value of the future cashflows, excluding the investment expenditure, is expected to be $15 million.
Which TWO of the following divestment methods are most likely to be suitable for the company?
- A. Management buy-out
- B. Spin-off
- C. Liquidation
- D. Trade sale
- E. De-merger
Answer: C,D
NEW QUESTION 110
Which THREE of the following are benefits of integrated reporting?
- A. Reduce the amount of work that is required to produce the report and accounts.
- B. Improve short term decision making.
- C. Improve the quality of information available to the providers of financial capital.
- D. Promote an understanding of the interdependencies of capitals.
- E. Support integrated decision-making.
Answer: C,D,E
NEW QUESTION 111
H Company has a fixed rate load at 10.0%, but wishes to swap to variable. It can borrow at LIBOR 8%.
The bank is currently quoting swap rates of 3.1% (bid) and 3.5% (ask).
What net rate will H Company pay if it enters into the swap?
- A. LIBOR +6.9%
- B. LIBOR +3.1%
- C. LIBOR +8%
- D. LIBOR +6.5%
Answer: A
NEW QUESTION 112
A profitable company wishes to dispose of a loss-making division that generated negative free cashflow in the last financial year.
The division requires significant new investment to return it to profitability.
Which of the following valuation approaches is likely to be the most useful to the company when negotiating the sales price?
- A. P/E ratio applied to forecast earnings next year
- B. Dividend growth model
- C. Discounted forecast free cashflow
- D. Asset basis
Answer: C
NEW QUESTION 113
A company has:
* 10 million $1 ordinary shares in issue
* A current share price of $5.00 a share
* A WACC of 15%
The company holds $10 million in cash. No interest is earned on this cash.
It will invest this in a project with an expected NPV of $4 million.
In a semi-strong efficient stock market, which of the following is the most likely share price immediately after the announcement of the new investment?
- A. $5.40
- B. $6.80
- C. $5.30
- D. $6.40
Answer: A
NEW QUESTION 114
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