F3 Braindumps PDF, CIMA F3 Exam Cram [Q75-Q98]

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NEW QUESTION 75
A company's main objective is to achieve an average growth in dividends of 10% a year.
In the most recent financial year:

Sales are expected to grow at 8% a year over the next 5 years.
Costs are expected to grow at 5% a year over the next 5 years.
What is the minimum dividend payout ratio in 5 years' time that would allow the company to achieve its objective?

• A. 22.5%
• B. 30.0%
• C. 21.7%
• D. 27.5%

Answer: C

 

NEW QUESTION 76
When valuing an unlisted company, a P/E ratio for a similar listed company may be used but adjustments to the P/E ratio may be necessary.
Which THREE of the following factors would justify a reduction in the proxy p/e ratio before use?

• A. A lower level of scrutiny and regulation for unlisted companies.
• B. Control premium not being included within the proxy p/e ratio used.
• C. The relative lack of marketability of unlisted company shares.
• D. The forecast earnings growth being relatively higher in the unlisted company.
• E. A profit item within the unlisted company's latest earnings which will not reoccur.
• F. Unlisted companies being generally smaller and less established.

Answer: A,C,F

 

NEW QUESTION 77
Company A is identical in all operating and risk characteristics to Company B, but their capital structures differ.
Company B is all-equity financed. Its cost of equity is 17%.
Company A has a gearing ratio (debt:equity) of 1:2. Its pre-tax cost of debt is 7%.
Company A and Company B both pay corporate income tax at 30%.
What is the cost of equity for Company A?

• A. 21.2%
• B. 17.0%
• C. 20.5%
• D. 22.0%

Answer: C

 

NEW QUESTION 78
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 79
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 = $24 million, and maximum = $45 million.
• C. Minimum = $32 million, and maximum = $60 million.
• D. Minimum = $27 million, and maximum = $30 million.

Answer: D

 

NEW QUESTION 80
A company has a cash surplus which it wishes to distribute to shareholders by a share repurchase rather than paying a special dividend.
Which THREE of the following statements are correct?

• A. The payment of a special dividend could raise shareholders' expectations of similar distributions in the future, unlike a share repurchase.
• B. Determination of the repurchase price will be easy as shareholders will insist on receiving the open market price.
• C. The share repurchase, if approved by the shareholders, will be binding on all of the company's shareholders.
• D. Different tax regimes could result in shareholders having a preference for a share repurchase due to the often more preferential tax treatment of capital gains.
• E. The share repurchase could send a negative signal to shareholders as it could be interpreted as a failure of management to find suitable investment opportunities.

Answer: A,D,E

 

NEW QUESTION 81
Company M's current profit before interest and taxation is $5.0 million.
It has a long-term 10% corporate bond in issue with a nominal value of $10 million.
The rate of corporate tax is 25%.
It plans to continue to pay out 50% of its earnings in dividends and earnings are expected to grow by 3% each year in perpetuity.
Its cost of equity is 10%.
Using the dividend growth model, advise the Board of Directors of Company M which of the following provide a reasonable valuation of Company M's equity?

• A. $50.1 million
• B. $22.1 million
• C. $44.1 million
• D. $73.6 million

Answer: B

 

NEW QUESTION 82
A profit-seeking company intends to acquire another company for a variety of reasons, primarily to enhance shareholder wealth.
Which THREE of the following offer the greatest potential for enhancing shareholder wealth?

• A. Elimination of existing competition.
• B. Achieving greater cultural diversity.
• C. Exploiting production synergies.
• D. Acquiring Intellectual Property assets.
• E. Creating new opportunities for employees.
• F. Achieving more press coverage for the company.

Answer: A,C,D

 

NEW QUESTION 83
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 C
• B. Company B
• C. Company D
• D. Company A

Answer: B

 

NEW QUESTION 84
Two companies that operate in the same industry have different Price/Earnings (P/E) ratios as follows:

Which of the following is the most likely explanation of the different P/E ratios?

• A. Company B has higher expected future growth than Company A.
• B. Company B has higher business risk than Company A.
• C. Company B has a greater profit this year than Company A.
• D. Company B has higher gearing than Company A.

Answer: A

 

NEW QUESTION 85
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 = $7.28 million (The covenant will not be breached).
• B. The earnings will be = $5.44 million (The covenant will be breached).
• C. The earnings will be = $11.50 million (The covenant will not be breached).
• D. The earnings will be = $6.80 million (The covenant will be breached).

Answer: D

 

NEW QUESTION 86
A company has a covenant on its 5% long-term bond, stipulating that its retained earnings must not fall below
$2 million.
The company has 100 million shares in issue.
Its most recent dividend was $0.045 per share. It has committed to grow the dividend per share by 4% each year.
The nominal value of the bond is $60 million. It is currently trading at 80% of its nominal value.
Next year's earnings before interest and taxation are projected to be $11.25 million.
The rate of corporate tax is 20%.
If the company increases the dividend by 4%, advise the Board of Directors if the level of retained earnings will comply with the covenant?

• A. Covenant is breached as retained earnings = $1.92 million.
• B. The covenant is not breached as retained earnings = $4.68 million.
• C. Covenant is not breached as retained earnings = $2.40 million.
• D. Covenant is not breached as retained earnings = $2.10 million.

Answer: A

 

NEW QUESTION 87
Company P is a large unlisted food-processing company.
Its current profit before interest and taxation is $4 million, which it expects to be maintainable in the future.
It has a $10 million long-term loan on which it pays interest of 10%.
Corporate tax is paid at the rate of 20%.
The following information on P/E multiples is available:

Which of the following is the best indication of the equity value of Company P?

• A. $40 million
• B. $80 million
• C. $24 million
• D. $48 million

Answer: C

 

NEW QUESTION 88
A company is considering the issue of a convertible bond compared to a straight bond issue (non- convertible bond).
Director A is concerned that issuing a convertible bond will upset the shareholders for the following reasons:
* it will dilute their control
* the interest payments will be higher therefore reducing liquidity
* it will increase the gearing ratio therefore increasing financial risk Director B disagrees, and is preparing a board paper to promote the issue of the convertible bond rather than a non-convertible.
Advise the Director B which THREE of the following statements should be included in his board paper to promote the issue of the convertible bond?

• A. Over the life of the bond, a convertible will be more expensive than a non-convertible.
• B. When converted into shares, the company will receive a cash inflow which can be used for future investments.
• C. Issuing a convertible bond will have a more favourable impact on the gearing ratio than a non- convertible bond.
• D. The coupon rate on the convertible bond will be lower than that on a non-convertible bond.
• E. The convertible bond may not dilute control as the bond holder has an option to choose conversion.

Answer: C,D,E

 

NEW QUESTION 89
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. $2,000,000
• D. $1,050,000

Answer: A

 

NEW QUESTION 90
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 25 existing shares
• B. 1 new share for every 4 existing shares
• C. 1 new share for every 20 existing shares
• D. 1 new share for every 5 existing shares

Answer: B

Explanation:
Calc_Set2

 

NEW QUESTION 91
A large, listed company in the food and household goods industry needs to raise $50 million for a period of up to 6 months.
It has an excellent credit rating and there is almost no risk of the company defaulting on the borrowings.
The company already has a commercial paper programme in place and has a good relationship with its bank.
Which of the following is likely to be the most cost effective method of borrowing the money?

• A. Treasury Bills
• B. Bank overdraft
• C. 6 month term loan
• D. Commercial paper

Answer: D

 

NEW QUESTION 92
A company plans a four-year project which will be financed by either an operating lease or a bank loan.
Lease details:
* Four year lease contract.
* Annual lease rentals of $45,000, paid in advance on the 1st day of the year.
Other information:
* The interest rate payable on the bank borrowing is 10%.
* The capital cost of the project is $200,000 which would have to be paid at the beginning of the first year.
* A salvage or residual value of $100,000 is estimated at the end of the project's life.
* Purchased assets attract straight line tax depreciation allowances.
* Corporate income tax is 20% and is payable at the end of the year following the year to which it relates.
A lease-or-buy appraisal is shown below:

Which THREE of the following items are errors within the appraisal?

• A. The salvage value has been included within the lease option
• B. Using the 10% discount rate is incorrect
• C. Lease payments are timed incorrectly
• D. The project's operating cashflows should be included
• E. Tax relief on lease payments have not been lagged correctly
• F. The bank loan repayments should be included

Answer: A,B,E

 

NEW QUESTION 93
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 be in compliance with both covenants.
• C. The company will be in breach of the covenant in respect of interest cover only.
• D. The company will breach the covenant in respect of retained earnings only.

Answer: D

 

NEW QUESTION 94
An unlisted company which is owned and managed by its original founders has accumulated excess cash following many years of profitable trading.
The Board of Directors is comprised of the four original founders who each hold 25% of the equity share capital.
Which THREE of the following will be significant considerations when deciding on the company's dividend policy?

• A. The adequacy of the pension funds of the original founders.
• B. The cash requirements of the shareholders in the foreseeable future.
• C. The dividend policy of listed companies in the same industry.
• D. The impact of the dividend policy on the company's share price.
• E. Income tax rates and the personal tax liabilities of the shareholders.

Answer: A,B,E

 

NEW QUESTION 95
An all equity financed company reported earnings for the year ending 31 December 20X1 of $8 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 4%.
The company pays corporate income tax at 20%.
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. $10.50 million
• B. $6.69 million
• C. $10.54 million
• D. $8.40 million

Answer: C

 

NEW QUESTION 96
Modigliani and Miller are the main proponents of the view that the dividend policy is irrelevant to the value of a company's shares.
They argue that a company that continually reinvests its entire earnings would generate the same shareholder wealth if it engaged in a policy of high dividends and financed its expansion with funds obtained from rights issues.
Which THREE of the following statements are assumptions that are required in order to support this proposition?

• A. There is a multiplicity of corporate and personal income tax rates.
• B. There are no transaction costs involved in the issue of new shares (including rights issues).
• C. The capital markets are efficient markets.
• D. Investors do not always have access to perfect information.
• E. Investors act in a rational manner.

Answer: B,C,E

Explanation:
Explanation
Discursive_F0

 

NEW QUESTION 97
Company Z has identified four potential acquisition targets: companies A, B, C and D.
Company Z has a current equity market value of $580 million.
The price it would have to pay for the equity of each company is as follows:
Only one of the target companies can be acquired and the consideration will be paid in cash.
The following estimations of the new combined value of Company Z have been prepared for each acquisition before deduction of the cash consideration:
Ignoring any premium paid on acquisition, which acquisition should the directors pursue?

• A. D
• B. B
• C. A
• D. C

Answer: D

 

NEW QUESTION 98
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