CIMA CIMAPRA19-F03-1 Exam Questions Instant Access

Question 1

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

Question 2

A major energy company, GDE, generates and distributes electricity in country

AThe government of country A is concerned about rising inflation and has imposed price controls on GDE, limiting the price it can charge per unit of electricity sold to both domestic and commercial customers. It is likely that price controls will continue for the foreseeable future.
The introduction of price controls is likely to reduce the profit for the current year from $3 billion to $1 billion.
The company has:
* Distributable reserves of $2 billion.
* Surplus cash at the start of the year of $1 billion.
* Plans to pay a total dividend of $1.5 billion in respect of the current year, representing a small annual increase as in previous years. However, no dividends have yet been announced.
Which THREE of the following responses would be MOST appropriate for GDE following the imposition of price controls?

AAnnounce a reduction in the annual dividend to a more sustainable level given the new price controls regime.

BCarry out a wide-ranging review of costs and staffing levels to identify possible cost savings and redundancies.

CActively investigate potential new ways of generating revenue by the sale of related goods and services that are outside the scope of the price controls.

DRaise funds by means of a rights issue in order to maintain historical dividend levels.

EActively look for a private equity investor to introduce new and innovative business and financial strategies to the business.

Answer : A, A, B, C

Question 3

AA is considering changing its capital structure. The following information is currently relevant to AA:

The gearing rating raising the new debt finance will be 50%.

Which THREE of the following statement about the impact of AA's change in capital structure are true under Modigliani and Miler's capital structure theory with tax.

AThe cost of debt will increase above 4%

BThe WACC will decrease below 7.6%

CThe cost of equity will increase above 10%

DThe cost of equity will decrease below 10%

EThe WACC increase above 7.6

FThe cost of debt remain unchanged at 4%

Answer : B, E, F

Question 4

An unlisted software development company has recently reported disappointing results. This was partly due to weak economic conditions but also because of its poor competitive position. The company has a number of exciting development opportunities which would enable it to achieve significant future growth. The company's growth potential has been hindered by its inability to secure sufficient new finance.

To enable the company raise new finance the Directors are considering working forwards an IPO in 10 years and accepting finance from a venture capitalist in order support in the intervening period.

The directors are keen to retain a controlling stake in the company and full representation on the board. They therefore require venture capitalists to provide funds as a mix of debt and equity and not soley equity finance.

Which THREE of the following are most likely to disrupt the directors' plans to use venture capital finance?

AVenture capitalists normally expect at least one seat on the board.

BVenture capitalists only provide equity finance and will therefore not be interested in providing a combination of debt and equity finance.

CThe venture capital finance offered is much more expensive than expected.

DVenture capitalists normally expect an exit strategy sconer than the planned IPO in 10 years'time.

EVenture capitalists always require ownership of more than 50% of the shares in a company to ensure control.

Answer : A, C, D

Question 5

Company U has made a bid for the entire share capital of Company B.

Company U is offering the shareholders in Company B the option of either a share exchange or a cash alternative.

Advise the shareholders in Company B which THREE of the following would be considered disadvantages of accepting the cash consideration?

ACash consideration is certain whereas Company U's future share price performance is uncertain.

BInterest rates on deposit accounts are currently at a historic low and are expected to remain low.

CCompany U is not expected to change its dividend policy post-acquisition.

DTaxation is payable on realised capital gains.

EThere will be no opportunity to participate in the future economic success of Company U.

Answer : B, D, E

Question 6

A company is based in Country Y whosefunctionalcurrency isY$. It has an investment in CountryZwhosefunctionalcurrency isZ$.

This year the company expects to generateZ$10 million profit after tax.

Tax Regime:

* Corporate income taxrate in country Yis 50%

* Corporate income tax rate in country Z is 20%

* Full double tax relief is available

Assume an exchange rate ofY$1 = Z$ 5.

What is the expected profit after tax in Y$ if the Z$ profit is remitted to Country Y?

AY$ 1.25 million

BY$ 1.00 million

CY$ 31.25 million

DY$ 4.00 million

Answer : A

Question 7

A listed companyfollows a policy of paying a constant dividend. The following information is available:

* Issued share capital (nominalvalue$0.50) $60 million

* Current market capitalisation $480 million

The shareholders are requesting an increased dividend this yearas earnings have been growing. However, the directors wish to retain as much cash as possible to fund new investments. They therefore plan to announce a 1-for-10 scrip dividend to replace the usual cash dividend.

Assuming no other influence on share price, whatis the expectedshare price following thescrip dividend?

Give your answer to 2 decimal places.

A3.64, 3.63, 3.65

B3.64, 3.63, 3.66

Answer : A

CIMA F3 Financial Strategy CIMAPRA19-F03-1 Exam Questions