CIMA CIMAPRA19-F03-1 Exam Questions Instant Access

Question 1

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 2

An entityprepares financial statements to 30 June.

During the year ended 30 June 20X2 the following events occurred:

1 July 20X1

* The entitiyborrowed $100 million at a variable rate of interest.

* In order to protect itself against the variability of its interest cashflows, the entityentered into a pay-fixed-receive-variable interest swap with annual settlements. The fair value of the swap on this datewas zero.

30 June 20X2

* The entityreceived a net settlement of $2 million under the swap. After this net settlement, the fair value of the swap was $5 million - a financial asset.

The entitydecides to use hedge accounting for this arrangement and has designated it as a cash flow hedge. The swap is a perfect hedge of the variability of the cash interest payments.

Which of the following describes the treatment of the settlement and the change in the fair value of the swap in the statement of profit or loss and other comprehensive income for the year ended 30 June 20X2?

A$7 million is recognised in profit or loss.

B$7 million is recognised in other comprehensive income.

C$2 million is recognised in profit or loss and $5 million is recognised in other comprehensive income.

D$5 million is recognised in profit or loss and $2 million is recognised in other comprehensive income.

Answer : C

Question 3

A company plans to raise S15 million to finance an expansion project using a rights issue Relevant data

* Shares will be offered at a 20% discount to the present market price of S12 50 per share

* There are currently 3 million shares in issue

* The project is forecast to yield a positive NPV of $9 million

What is the yield-adjusted Theoretical Ex-Rights Price following the announcement of the rights issue?

A$11.67

B$11 25

C$9.50

D$13.67

Answer : A

Question 4

A manufacturing company is based in CountryL whosecurrency istheL$.

One of the company's products isexportedto Country M, a rapidly growing economy, whose currency is the M$.

In the most recent financial year:

* 100,000 units of the product were sold tocustomers incountry M

* The unit selling price wasM$12

The spot rate today isL$1 = M$5

The companyhas an objective of growth intotalsales value in L$ of 10% a year.

If theL$ strengthens by5% nextyear against the M$, whatvolume of sales of this productisneeded next yearto achieve the objective?

A115,500 units

B104,500 units

C105,000 units

D110,000 units

Answer : A

Question 5

The directors of the following four entities have been discussing dividend policy:

Which of these four entities is most likely to have a residual dividend policy?

Answer : B

Question 6

Company A has agreed to buy all the share capital of Company B.

The Board of Directors of Company A believes that the post-acquisition value of the expanded business can be computed using the "boot-strapping" concept.

Which of the following most accurately describes "boot-strapping" in this context?

AForecasting the future free cash flows of the combined entities and discounting these at the bidder's Weighted Average Cost of Capital

BAdding together the current post tax earnings of each company and multiplying this by the price earnings ratio of the acquired entity

CAdding together the current post-tax earnings of each company and multiplying this by the price/earnings ratio of the bidder

DCombining the pre-acquisition market capitalisation of each company

Answer : C

Question 7

A company has an opportunity to invest in a positive net present value project, but the project would require debt finance that would push the company's gearing ever a limit imposed by a debt covenant on an existing loan.

Which THREE of the following actions could be taken by the company?

AThe company could approach its existing Lenders to negotiate a relaxation of :he conditions imposed by the covenant.

BThe project could be foregone if it cannot be funded without breaching the covenant

CThe project could proceed if the cash inflows from the project will enable some of the debt to be repaid before the end of the financial year and so the breach of covenant may never be detected

DThe company could seek alternative sources of finding, such as a reduction in the annual dividend payment, to finance the project.

EThe directors could meet with key shareholder to discuss whether they wish the project proceed despite the breach of the covenant

FThe directors could proceed will the project because their primary duly is maximise shared older wealth, even if that conflicts with lenders' interest.

Answer : A, B, D

CIMA F3 Financial Strategy CIMAPRA19-F03-1 Exam Questions