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Certification Path for CIMA F3: Financial Strategy Exam
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To prepare for the CIMA CIMAPRA19-F03-1 exam, candidates should study the syllabus thoroughly and practice past papers. The syllabus covers a range of topics, including financial reporting and analysis, corporate finance, and risk management. Candidates should also have a good understanding of financial accounting principles and be able to apply them in practice.
NEW QUESTION # 106
XYZ has a variable rate loan of $200 million on which it is paying interest of Liber ' 3%.
XYZ entered into a swap with AG bank to convert this to a fixed rate 8% loan. AB bank charges an annual commission of 0.4% for making this arrangement
Calculate the net payment from KYZ to AB bank at the end of the first year if Libor was 2% throughout the year.
Give your answer in $ million, to one decimal place.
- A. 22.9
- B. 22.8
Answer: B
Explanation:
NEW QUESTION # 107
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. Increasing Revenue
- C. Providing consistently high levels service quality
- D. Maintaining sufficient liquidity in the business to avoid overtrading
- E. Increasing the dividend payment year on year
Answer: A,B,D
NEW QUESTION # 108
M is an accountant who wishes to take out a forward rate agreement as a hedging instrument but the company treasurer has advised that a short-term interest rate future would be a better option.
Which of the following is true of a short-term interest rate future?
- A. It can be tailored to the exact reeds of the company.
- B. It must be kept for ne whole duration of the contract
- C. It interest rates have gone down the price of the future will have fallen.
- D. The date is flexible and the position can be closed quickly and easily.
Answer: B
NEW QUESTION # 109
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$ 1.00 million
- B. Y$ 1.25 million
- C. Y$ 4.00 million
- D. Y$ 31.25 million
Answer: B
NEW QUESTION # 110
A listed company in a high technology industry has decided to value its intellectual capital using the Calculated Intangible Value method (CIV).
Relevant data for the company:
* Pays corporate income tax at 30%
* Cost of equity is 9%, pre-tax cost of debt is 7% and the WACC is 8%
* The value spread has been calculated as $26 million
Calculate the CIV for the company.
- A. 289 million
- B. 531 million
- C. 325 million
- D. 228 million
Answer: D
NEW QUESTION # 111
A company's dividend policy is to pay out 50% of its earnings.
Its most recent earnings per share was $0.50, and it has just paid a dividend per share of $0.25.
Currently, dividends are forecast to grow at 2% each year in perpetuity and the cost of equity is 10.5%.
In order to grow its earnings and dividends, the company is considering undertaking a new investment funded entirely by debt finance. If the investment is undertaken:
* Its cost of equity will immediately increase to 12% due to the increased finance risk.
* Its earnings and dividends will immediately commence growing at 4% each year in perpetuity.
Which of the following is the expected percentage change in the share price if the new investment is undertaken?
- A. Increase = 8.3%
- B. Increase = 2%
- C. Increase = 10.5%
- D. Decrease = 7.7%
Answer: A
NEW QUESTION # 112
Company ACC. an ungeared car manufacturer has launched a takeover bid of Company BDD. a key competitor operating in the same industry Company BDD has high gearing Company ACC has a large surplus cash balance and believes that the acquisition is an opportunity to enhance shareholder wealth through the realisation of synergistic benefits. Which THREE of the following would most likely be synergistic benefits to Company ACC of purchasing Company BDD9 I
- A. Decreased cost of debt
- B. Reduction in staff costs due to the removal of duplicated roles.
- C. Cost savings in production due to economies of scale
- D. Enhanced profit due to reduced competition
- E. Reduction in financial risk due to diversification
Answer: A,B,C
NEW QUESTION # 113
A company has stable earnings of S2 million and its shares are currently trading on a price earnings multiple {PIE) of 10 times. It has10 million shares in issue.
The company is raising S4 million debt finance to fund an expansion of its existing business which is forecast to increase annual earnings straight away by 25% and then remain at that level for the foreseeable future. The corporation tax rate is 20%. It is expected that the P/E will reduce to 8 times over the next year.
What is the most likely change in shareholder wealth resulting from this plan?
- A. Shareholder wealth will increase by $5 million
- B. No change in shareholder wealth.
- C. Shareholder wealth will increase by $4 million.
- D. Shareholder wealth will increase by $3.2 million.
Answer: C
NEW QUESTION # 114
Company A has just announced a takeover bid for Company B. The two companies are large companies in the same industry_ The bid is considered to be hostile.
Company B's Board of Directors intends to try to prevent the takeover as they do not consider it to be in the best interests of shareholders
Which THREE of the following are considered to be legitimate post-offer defences?
- A. Have all the assets independently professionally revalued to demonstrate that the offer undervalues the company
- B. Alter the memorandum and articles of association to state that a minimum of 75% of shareholders must agree to the bid before it can proceed
- C. Refer the bid to the competition authorities to try to have the bid prohibited on competition grounds
- D. Publish very optimistic financial forecasts for Company B even though the Board of Directors realises that these are highly unlikely to be achievable
- E. Make a counter bid for Company A provided such an acquisition could enhance Company B's shareholder wealth
Answer: B,C,E
NEW QUESTION # 115
Company X is an established, unquoted company which provides IT advisory services.
The company's results and cashflows are growing steadily and it has few direct competitors due to the very specialised nature of it's business. Dividends are predictable and paid annually.
Company P is looking to buy 30% of company X's equity shares.
Which TWO of the following methods are likely to be considered most suitable valuation methods for valuing company P's investment in Company X?
- A. Cash based using free cash flow before interest
- B. Dividend based using DVM
- C. P/E ratio method using IT industry average
- D. Earnings yield method using a listed IT company as proxy
- E. Asset based using replacement cost
Answer: A,B
NEW QUESTION # 116
The Board of Directors of a small listed company engaged in exploration are currently considering the future dividend policy of the company. Exploration is considered a high-risk business and consequently the company has a low level of debt finance.
Forecasts indicate a period of profit fluctuation in the next few years as the company is planning to embark on a major capital investment project. Debt finance is unlikely to be available due to the project's high business risk.
Which THREE of the following are practical considerations when determining the company's dividend/retention policy?
- A. The dividend policies of mature listed multinational companies in the exploration industry.
- B. The fluctuating nature of the projected future profits.
- C. The general level of interest rates and the tax savings on interest costs relating to debt finance.
- D. The legislation and regulation governing distributable profits.
- E. The timing and size of the cash flow requirements for the new investment.
Answer: B,D,E
Explanation:
Discursive_F0
NEW QUESTION # 117
Listed Company A has prepared a valuation of an unlisted company. Company B. to achieve vertical integration Company A is intending to acquire a controlling interest in the equity of Company B and therefore wants to value only the equity of Company B.
The assistant accountant of Company A has prepared the following valuation of Company B's equity using the dividend valuation model (DVM):
Where:
* S2 million is Company B's most recent dividend
* 5% is Company B's average dividend growth rate over the last 5 years
* 10% is a cost of equity calculated using the capital asset pricing model (CAPM), based on the industry average beta factor
Which THREE of the following are valid criticisms of the valuation of Company B's equity prepared by the assistant accountant?
- A. The 5% growth rate may not reflect the future growth of Company B.
- B. An unlisted company cannot use the capital asset pricing model to calculate its cost of equity
- C. The beta factor used may not reflect Company B's financial risk.
- D. It is better to use the present value of earnings rather than present value of dividends to value a controlling interest
- E. The DVM calculation should use Company A's cost of equity rather than Company B's cost of equity
Answer: A,C,E
NEW QUESTION # 118
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 # 119
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 # 120
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. Change the Articles of Association to increase the percentage of shareholder votes required to approve a takeover.
- B. Refer the bid to the country's competition authorities.
- C. Pay a one-off special dividend.
- D. Write to shareholders explaining fully why the company's share price is under valued.
Answer: D
NEW QUESTION # 121
On 1 January:
* Company X has a value of $50 million
* Company Y has a value of $20 million
* Both companies are wholly equity financed
Company X plans to take over Company Y by means of a share exchange. Following the acquisition the post-tax cashflow of Company X for the foreseeable future is estimated to be $8 million each year. The post-acquisition cost of equity is expected to be 10%.
What is the best estimate of the value of the synergy that would arise from the acquisition?
- A. $10 million
- B. $30 million
- C. $60 million
- D. $100 million
Answer: A
NEW QUESTION # 122
A listed company is planning to raise $21.6 million to finance a new project with a positive net present value of $5 million. The finance is to be raised via a rights issue at a 10% discount to the current share price. There are currently 100 million shares in issue, trading at $2.00 each.
Taking the new project into account, what would the theoretical ex-rights price be?
Give your answer to two decimal places.
$ ?
Answer:
Explanation:
2.02, 2.03
NEW QUESTION # 123
A company has a financial objective of maintaining a gearing ratio of between 30% and 40%, where gearing is defined as debt/equity at market values.
The company has been affected by a recent economic downturn leading to a shortage of liquidity and a fall in the share price during 20X1.
On 31 December 20X1 the company was funded by:
* Share capital of 4 million $1 shares trading at $4.0 per share.
* Debt of $7 million floating rate borrowings.
The directors plan to raise $2 million additional borrowings in order to improve liquidity.
They expect this to reassure investors about the company's liquidity position and result in a rise in the share price to $4.2 per share.
Is the planned increase in borrowings expected to help the company meet its gearing objective?
- A. No, gearing would increase but the gearing objective would be met both before and after the announcement.
- B. No, gearing would increase and the gearing objective would be met before the announcement but exceeded after the announcement.
- C. Yes, gearing would fall and the gearing objective would be exceeded before the announcement but met after the announcement.
- D. No, gearing would increase and the gearing objective would be exceeded both before and after the announcement.
Answer: D
NEW QUESTION # 124
Company H is considering the valuation of an unlisted company which it hopes to acquire.
It has obtained the target company's financial statements.
Company H has been advised that the book value of net assets as shown in the financial statements of the target company does not provide a reliable indicator of their true value.
Advise the Board of Directors which of the following THREE statements are disadvantages of the net asset basis of valuation?
- A. Intangible assets are often not shown in the company's financial statements.
- B. The net realisable value is usually different from the net book value shown in the financial statements.
- C. The net book value of assets is merely a record of past transactions which complies with accounting conventions.
- D. The net book value of current assets is normally a reliable indicator of their realisable value.
- E. The net book value of assets can be obtained from the financial statements.
Answer: A,B,C
NEW QUESTION # 125
A company's latest accounts show profit after tax of $20.0 million, after deducting interest of $5.0 million. The company expects earnings to grow at 5% per annum indefinitely.
The company has estimated its cost of equity at 12%, which is included in the company WACC of 10%.
Assuming that profit after tax is equivalent to cash flows, what is the value of the equity capital?
Give your answer to the nearest $ million.
$ ? million
- A. 300, 300000000
- B. 100, 300000000
Answer: A
NEW QUESTION # 126
Two unlisted companies TTT and YYY are being valued. The companies have similar capital structures and risk profiles and operate in the same industry sector It is easier to value TTT than to value YYY because there have recently been several well-publicised private sales of TTT shares.
Relevant company data:
What is the best estimate of YYY's share price?
- A. $1.20
- B. $0.60
- C. $0.94
- D. $0.68
Answer: A
NEW QUESTION # 127
A company in country T is considering either exporting its product directly to customers in country P or establishing a manufacturing subsidiary in country P.
The corporate tax rate in country T is 20% and 25% tax depreciation allowances are available Which TIIRCC of the following would be considered advantages of establishing a subsidiary in country T?
- A. There are high customs cuties payable of products entering country P.
- B. Year 1 tax depreciation allowances of 100% are available in country P.
- C. The corporate tsx rate in country P is 40%.
- D. There are restrictions on companies wishing to remit profit from country P
- E. There is a double tax treaty between country T and country P.
Answer: A,B,E
NEW QUESTION # 128
A listed company is planning to raise $21.6 million to finance a new project with a positive net present value of $5 million. The finance is to be raised via a rights issue at a 10% discount to the current share price. There are currently 100 million shares in issue, trading at $2.00 each.
Taking the new project into account, what would the theoretical ex-rights price be?
Give your answer to two decimal places.
Answer:
Explanation:
$ ?
2.02, 2.03
NEW QUESTION # 129
A company is financed as follows:
* 400 million $1 shares quoted at $3.00 each.
* $800 million 5% bonds quoted at par.
The company plans to raise $200 million long term debt to finance a project with a net present value of
$100 million.
The bank that is providing the debt is insisting on a maximum gearing level covenant.
Gearing will be based on market values and calculated as debt/(debt + equity).
What is the lowest figure for the gearing covenant that the bank could impose without the company breaching the agreement?
- A. 43%
- B. 46%
- C. 45%
- D. 44%
Answer: D
NEW QUESTION # 130
An analyst has valued a company using the free cash flow valuation model.
The analyst used the following data in determining the value:
* Estimated free cashflow in 1 year's time = $100,000
* Estimated growth in free cashflow after the first year = 5% each year indefinitely
* Appropriate cost of equity = 10%
The result produced by the analyst was as follows:
Value of equity = $100,000 (1+0.05)/0.10 = $1,050,000
The analyst made a number of errors in determining the value.
By how much has the analyst undervalued the company?
- A. $950,000
- B. $2,100,000
- C. $1,050,000
- D. $2,000,000
Answer: A
NEW QUESTION # 131
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The F3 Financial Strategy exam is ideal for finance professionals who are looking to expand their knowledge and skills in the field of financial management. F3 exam is particularly beneficial for those who are looking to advance their careers in corporate finance, investment banking, or financial analysis. The F3 Financial Strategy exam is also suitable for those who want to enhance their knowledge and skills in financial management to improve their job performance.
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