CIMA CIMAPRA19-F03-1 Exam Practice Test Instant Access

Question 1

Which THREE of the following statements are true of a money market hedge?

AThey offer roughly the same outcome as a forward contract.

BThey leave the company exposed to currency risks.

CThey may be a little more flexible in comparison to a forward contract.

DThey are more complex than forward contracts.

EThey are easy to set up.

Answer : A, B, D

Question 2

Company BBB has prepared a valuation of a competitor company, Company BBD. Company BBB is intending to acquire a controlling interest in the equity of Company BBD and therefore wants to value only the equity of Company BBD.

The directors of Company BBB have prepared the following valuation of Company BBD:

Value of Equity = 4.63 + 5.14 + 5.56 = S15.33 million

Additional information on Company BBD:

Which THREE of the following are weaknesses of the above valuation?

AFree cash flows to all investors should be discounted at the cost of equity of 10% rather than WACC of 8%.

BThe valuation is understated as forecast future growth has been ignored beyond year 3.

CThe valuation is understated as the directors have failed to include a perpetuity factor in the calculations.

DThe approach used calculates the value of the total entity not the value of equity.

EThe valuation is overstated as the directors have failed to deduct tax from the free cash flows.

Answer : C, D, E

Question 3

A company is planning a new share issue.

The funds raised will be used to repay debt on which it is currently paying a high interest rate.

Operating profit and dividends are expected to remain unchanged in the near future.

If the share issue is implemented, which THREE of the following are most likely to increase?

AThe cost of equity

BThe number of shares in issue

CNext year's payment of corporate income tax

DThe gearing (book value of debt as a percentage of the book value of equity + debt)

EInterest cover

Answer : B, C, D

Question 4

Company AEE has a 10 year 6% corporate bond in issue which has a nominal value of $400 million, which is currently trading at 95%. The bond is secured on the company's property

The Board of Directors has calculated the equity value of Company AEE as follows;

Which THREE of the following are errors in the valuation?

AIncluding retained earnings from the Statement of Financial Position.

BDeducting $400 million for the value of the company's corporate bond.

CUsing the company's weighted average cost of capital to discount cash flows attributable to shareholders.

DUsing cash flows to equity rather than expected dividends as the initial cash flows.

EDeducting replacement capital expenditure

Answer : A, C, E

Question 5

D has US$10 million to invest over 12 months in either USS or GBP Its options are to invest in USS at the present USS interest rate of 10 18%. or to convert the USS to GBP at the spot rate GBP1 =US$1 61 and invest in GBP at an interest rate of 6.4%.

According to the interest rate parity theory, what will the one year forward rate be?

Give your answer to three decimal places.

A1.667

B1.668

Answer : A

Question 6

JAG and ZEB are two listed companies. JAG is approximately 20 times the size of ZEB.

10 days ago JAG made a hostile bid for ZEB. offering a share exchange.

The bid price represents a 10% profit to the shareholders of ZEB at today's market prices to reflect the high levels of synergistic benefits that JAG expects to realise from the transaction.

Which of the following is the greatest future threat to the post-transaction value for JAG?

AForecast synergistic benefits are not realised.

BNew shareholders acquired from ZEB demand a higher dividend payout than JAG is used to.

CNegative market response to the bid.

DNew shareholders acquired from ZEB withdraw their investment by selling their shares within 12 months.

Answer : A

Question 7

An unlisted company has the following data:

A listed company in the same industry has a P/E of 11.

The value of the unlisted company based on the P/E of this listed company is:

Give your answer to the nearest whole number.

Answer : A

CIMAPRA19-F03-1 F3 Financial Strategy Exam Practice Test