CIMA CIMAPRA19-F03-1 Exam Practice Test Instant Access

Question 1

A company's current earnings before interest and taxation are $5 million.

These are expected to remain constant for the forseeable future.

The company has 10 million shares in issue which currently tradeat $3.60.

It also has a $10 million long term floating rate loan.

The current interest rate on this loan is 5%.

The company pays tax at 20%.

The company expects interest rates to increasenext yearto 6% andit's Price/Earnings (P/E) ratioto move to 9.5 times by the end of next year.

What percentagereduction in the share pricewill occurby the end of next year iftheinterest rate increaseand theP/Emovementboth occur?

AReduction of 7%

BReduction of 5%

CReduction of 1%

DReduction of 0%

Answer : A

Question 2

TTT pic is a listed company. The following information is relevant:

TTT pic's board is considering issuing new 6% irredeemable debt to re-purchase equity. This is expected to change TTT pic's debt to equity mix to 40: 60 by market value. The corporate tax rate is 20%.

What will be TTT pic's WACC following this change in capital structure?

A11.66%

B12.67%

C13.43%

D11.09%

Answer : D

Question 3

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?

ABank overdraft

B6 month term loan

CTreasury Bills

DCommercial paper

Answer : D

Question 4

A company has a cash surplus which it wishes todistributeto shareholders by a share repurchase rather than paying a special dividend.

WhichTHREEof the following statementsare correct?

AThe payment of a special dividend could raise shareholders' expectations of similar distributions in the future, unlike a share repurchase.

BThe share repurchase could send a negative signal to shareholders as it could be interpreted as a failure of management to find suitable investment opportunities.

CDetermination of the repurchase price will be easy as shareholders will insist on receiving the open market price.

DDifferent tax regimes could result in shareholders having a preference for a share repurchase due to the often more preferential tax treatment of capital gains.

EThe share repurchase, if approved by the shareholders, will be binding on all of the company's shareholders.

Answer : A, B, D

Question 5

PYP is a listed courier company. It is looking to raise new finance to fit each of its delivery vans with new equipment to allow improved parcel tracking for customers The senior management team of PYP have decided on a 10-year secured bond to finance this investment-

Which TWO of the following variables are most likely to decrease the yield to maturity of the bond?

AChanging the term of the bond from 1 0 years to 5 years to match the expected life of the new equipment

BThe announcement of a new contract for PYP that will increase operating profits by 5/o over the next 5 years.

CThe senior management team decide to issue a convertible bond rather than a conventional bond

DThe senior management team decide to issue an unsecured bond rather than a secured bond

Answer : A, C

Question 6

A company has in a 5% corporate bond in issue on which there are two loan covenants.

* Interest covermust not fall below 3 times

* Retained earnings for the yearmust 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?

AThe company will be in compliance with both covenants.

BThe company will be in breach of both covenants.

CThe company will breach the covenant in respect of retained earnings only.

DThe company will be in breach of the covenant in respect of interest cover only.

Answer : C

Question 7

Providers of debt finance often insist on covenants being entered into when providing debt finance for companies.

Agreement and adherence to the specific covenants is often a condition of the loan provided by the lender.

Which THREE of the following statements are true in respect of covenants?

ACovenants are entered into to penalise the company.

BCovenants are entered into to give the lender added protection on the loan extended to the company.

CCovenants are entered into to impose financial discipline on the company.

DCovenants enable the lender to demand immediate repayment or to renegotiate terms if it is breached.

ECovenants are entered into to eliminate the tax liability of the company.

Answer : B, C, D

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CIMA F3 Financial Strategy CIMAPRA19-F03-1 Exam Practice Test