CIMA CIMAPRA19-F03-1 Exam Questions Instant Access

Question 1

Company ABC is planning to bid forcompanyDDD, an unlisted company in an unrelated industry sector to ABC.

The directors of ABC are considering a number of different valuation methods for DDDbefore making a bid.

Which of the following is the MOST appropriate method for ABC to use to value DDD?

AUsing DDD's tangible assets.

BApplying an industry P/E ratio to DDD's forecast earnings.

CDiscounting DDD's forecast cash flows using ABC's cost of equity.

DApplying Company ABC's P/E ratio to DDD's forecast earnings.

Answer : B

Question 2

A listed company plans to raise $350 million to finance a major expansion programme.

The cash flow projections for the programme are subject to considerable variability.

Brief details of the programme have been public knowledge for a few weeks.

The directors are considering two financing options, either a rights issue at a 20% discount to current share price or a long term bond.

The following data is relevant:

The company's share price has fallen by 5% over the past 3 months compared with a fall in the market of 3% over the same period.

The directors favour the bond option.

However, the Chief Accountant has provided arguments for a rights issue.

Which TWO of the following arguments in favour of a right issue are correct?

AThe issue of bonds might limit the availability of debt finance in the future.

BThe recent fall in the share price makes a rights issue more attractive to the company.

CThe rights issue will lead to less pressure on the operating cash flows of the programme.

DThe WACC will decrease assuming Modigliani and Miller's Theory of Capital Structure without taxes applies.

EThe administrative costs of a rights issue will be lower.

Answer : A, C

Question 3

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?

AWeak form

BSemi-strong form

CStrong form

DRandom walk

Answer : B

Question 4

A company has some 7% coupon bonds in issue and wishes tochangeitsinterest rate profile.

It has decided to do this by entering into a plain coupon interest rate swap with it's bank.

The bank has quoted a swap rate of: 6.0% - 6.5% fixed against LIBOR.

What will the company'snew interest rate profilebe?

AVARIABLE at LIBOR

BVARIABLE at LIBOR + 0.5%

CVARIABLE at LIBOR + 1.0%

DFIXED at 6.5%

Answer : C

Question 5

Company A is unlisted and all-equity financed. Itis trying to estimate its cost of equity.

The following information relates to anothercompany, 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 incometax is 20%.

The expectedpremium on the market portfolio is 7% and the risk-free rate is 5%.

What isthe estimated cost of equity for Company A?

Give your answer to one decimal place.

? %

A12.3, 12.30

B11.3, 12.30

Answer : A

Question 6

TU has relatively few tangible assets and is dependent for profits and growth on the high-value individuals it employs. Which of the following statements best explains why the net asset valuator method's considered unstable for TU?

ATU does not account for its tangible assets

BTU does not account for its intangible assets.

CTU accounts for its intangible assets at net realisable value.

DTU accounts for its intangible assets at historical value.

Answer : B

Question 7

Company M's currentprofit before interest and taxationis$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 dividendgrowthmodel, advise the Board of Directors of Company M which of the following provide areasonable valuation of Company M's equity?

A$73.6 million

B$22.1 million

C$44.1 million

D$50.1 million

Answer : B

CIMA F3 Financial Strategy CIMAPRA19-F03-1 Exam Questions