CIMA Exam 2023 F3 Dumps Updated Questions UPDATED Aug-2023
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NEW QUESTION # 45
A company plans a four-year project which will be financed by either an operating lease or a bank loan.
Lease details:
* Four year lease contract.
* Annual lease rentals of $45,000, paid in advance on the 1st day of the year.
Other information:
* The interest rate payable on the bank borrowing is 10%.
* The capital cost of the project is $200,000 which would have to be paid at the beginning of the first year.
* A salvage or residual value of $100,000 is estimated at the end of the project's life.
* Purchased assets attract straight line tax depreciation allowances.
* Corporate income tax is 20% and is payable at the end of the year following the year to which it relates.
A lease-or-buy appraisal is shown below:
Which THREE of the following items are errors within the appraisal?
- A. Lease payments are timed incorrectly
- B. The salvage value has been included within the lease option
- C. The project's operating cashflows should be included
- D. Tax relief on lease payments have not been lagged correctly
- E. Using the 10% discount rate is incorrect
- F. The bank loan repayments should be included
Answer: B,D,E
NEW QUESTION # 46
A company wishes to raise new finance using a rights issue. The following data applies:
* There are 10 million shares in issue with a market value of $4 each
* The terms of the rights will be 1 new share for 4 existing shares held
* After the rights issue, the theoretical ex-rights price (TERP) will be $3.80
Assuming all shareholders take up their rights, how much new finance will be raised ?
Give your answer to one decimal place.
$ ? million
- A. 7.5, 7.50
- B. 7.5, 6.50
Answer: A
NEW QUESTION # 47
An unlisted company is attempting to value its equity using the dividend valuation model.
Relevant information is as follows:
* A dividend of $500,000 has just been paid.
* Dividend growth of 8% is expected for the foreseeable future.
* Earnings growth of 6% is expected for the foreseeable future.
* The cost of equity of a proxy listed company is 15%.
* The risk premium required due to the company being unlisted is 3%.
The calculation that has been performed is as follows:
Equity value = $540,000 / (0.18 - 0.08) = $5,400,000
What is the fault with the calculation that has been performed?
- A. The cost of equity used in the calculation should have been 12% (15% subtract 3%).
- B. The cost of equity used in the calculation should have been 15%; no adjustment was necessary.
- C. The dividend cashflow used should have been $500,000 rather than $540,000.
- D. The dividend growth rate is unsuitable given that earning growth is lower than dividend growth.
Answer: D
NEW QUESTION # 48
Select the category of risk for each of the descriptions below:
Answer:
Explanation:
NEW QUESTION # 49
Company A operates in country A with the AS as its functional currency. Company A expects to receive BS500.000 in 6 months' time from a customer in Country B which uses the B$.
Company A intends to hedge the currency risk using a money market hedge
The following information is relevant:
What is the AS value of the BS expected receipt in 6 months' time under a money market hedge?
- A. AS31, 482
- B. AS32, 051
- C. AS32, 532
- D. AS31, 790
Answer: B
NEW QUESTION # 50
Company A has just announced a takeover bid for Company B.
The two companies are large companies in the same industry_ The bid is considered to be hostile.
Company B's Board of Directors intends to try to prevent the takeover as they do not consider it to be in the best interests of shareholders Which THREE of the following are considered to be legitimate post-offer defences?
- A. Make a counter bid for Company A provided such an acquisition could enhance Company B's shareholder wealth
- B. Have all the assets independently professionally revalued to demonstrate that the offer undervalues the company
- C. Refer the bid to the competition authorities to try to have the bid prohibited on competition grounds
- D. Alter the memorandum and articles of association to state that a minimum of 75% of shareholders must agree to the bid before it can proceed
- E. Publish very optimistic financial forecasts for Company B even though the Board of Directors realises that these are highly unlikely to be achievable
Answer: A,C,D
NEW QUESTION # 51
A listed company is planning a share repurchase.
Research into different offer prices has given the following data with regards acceptance by the shareholders at different prices:
What price should be offered to shareholders if the retained earnings of the company are to remain unchanged?
- A. $9.50
- B. $8.50
- C. $10.00
- D. $9.00
Answer: A
NEW QUESTION # 52
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.
- A. 1.668
- B. 1.667
Answer: B
NEW QUESTION # 53
Company A is a large well-established listed entertainment company and Company B is a small unlisted company specializing in providing online media streaming.
Company A has a gearing ratio of 60% (using book values) and interest cover of 2.
Company A is considering making an offer for Company B, either a cash offer financial by raising additional debt finance or a share-for-share exchange.
Which of the following is most likely to occur if Company A offers a share-for exchange rather than offering cash finance by raising debt?
- A. Eamings per share would be higher.
- B. There would be no dilution f of control.
- C. Geaning would be lower.
- D. Divided per share would be higher.
Answer: C
NEW QUESTION # 54
Company M's current profit before interest and taxation is $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 dividend growth model, advise the Board of Directors of Company M which of the following provide a reasonable valuation of Company M's equity?
- A. $22.1 million
- B. $50.1 million
- C. $44.1 million
- D. $73.6 million
Answer: A
NEW QUESTION # 55
A company's Board of Directors is assessing the likely impact of financing future new projects using either equity or debt.
The directors are uncertain of the effects on key variables.
Which THREE of the following statements are true?
- A. Retained earnings has no cost, and is therefore the cheapest form of equity finance.
- B. Equity finance will increase pressure to pay a higher total future dividend.
- C. Debt finance is always preferable to equity finance.
- D. The choice between using either equity or debt will have no impact on the amount of corporate income tax payable.
- E. Debt finance will increase the cost of equity.
- F. Equity finance will reduce the overall financial risk.
Answer: B,E,F
NEW QUESTION # 56
A company has a financial objective of maintaining a gearing ratio of between 30% and 40%, where gearing is defined as debt/equity at market values.
The company has been affected by a recent economic downturn leading to a shortage of liquidity and a fall in the share price during 20X1.
On 31 December 20X1 the company was funded by:
* Share capital of 4 million $1 shares trading at $4.0 per share.
* Debt of $7 million floating rate borrowings.
The directors plan to raise $2 million additional borrowings in order to improve liquidity.
They expect this to reassure investors about the company's liquidity position and result in a rise in the share price to $4.2 per share.
Is the planned increase in borrowings expected to help the company meet its gearing objective?
- A. No, gearing would increase but the gearing objective would be met both before and after the announcement.
- B. No, gearing would increase and the gearing objective would be met before the announcement but exceeded after the announcement.
- C. Yes, gearing would fall and the gearing objective would be exceeded before the announcement but met after the announcement.
- D. No, gearing would increase and the gearing objective would be exceeded both before and after the announcement.
Answer: D
NEW QUESTION # 57
WW is a quoted manufacturing company. The Finance Director has addressed the shareholders during WW's annual general meeting-She has told the shareholders that WW raised equity during the year and used the funds to repay a large loan that was maturing, thereby reducing WW's gearing ratio
At the conclusion of the Finance Director's speech one of the shareholders complained that it had been foolish for WW to have used equity to repay debt The shareholder argued that the Modigliani and Miller model (with tax) offers proof that debt is cheaper than equity when companies pay tax on their profits.
Which THREE arguments could the Finance Director have used in response to the shareholder?
- A. WW was approaching a debt covenant limit and it was therefore important to reduce gearing.
- B. Reducing the gearing ratio has reduced the financial risk of WW which will benefit shareholders
- C. The Modigliani and Miller model would only be valid in practice if WW's shareholders were aware of the model and believed in its validity
- D. The shareholder was confusing the cost of capital with shareholder wealth
- E. A lower gearing ratio will result in an increase in the value of the company
- F. A lower gearing ratio creates greater flexibility for WW in the future
Answer: A,B,E
NEW QUESTION # 58
F Co. is a large private company, the founder holds 60% of the company's share capital and her 2 children each hold 20% of the share capital.
The company requires a large amount of long-term finance to pursue expansion opportunities, the finance is required within the next 3 months. The family has agreed that an Initial Public Offering (IPO) should not be pursued at this time, because it would take up to 12 months to arrange.
The existing shareholders are currently considering raising the required finance from an established Venture Capitalist in the form of debt and equity. The Venture Capitalist has agreed to provide the required finance provided it can earn a return on investment of 25% per year. In addition, the Venture Capitalist requires 60% of the equity capital, a directorship in the company and a veto on all expenditure of a capital or revenue nature above a specified limit.
From the perspective of the family, which of the following are advantages of raising the required finance from the Venture Capitalist?
Select all that apply.
- A. The veto on expenditure above a specified level of a revenue or capital nature.
- B. The speed with which the finance can be obtained.
- C. The experience of the Venture Capitalist with growing businesses.
- D. The cost of the finance under the Venture Capital investment.
- E. The changes in shareholding as a result of the Venture Capital investment.
Answer: A,D
NEW QUESTION # 59
Company A, a listed company, plans to acquire Company T, which is also listed.
Additional information is:
* Company A has 100 million shares in issue, with market price currently at $8.00 per share.
* Company T has 90 million shares in issue,. with market price currently at $5.00 each share.
* Synergies valued at $60 million are expected to arise from the acquisition.
* The terms of the offer will be 2 shares in A for 3 shares in B.
Assuming the offer is accepted and the synergies are realised, what should the post-acquisition price of each of Company A's shares be?
Give your answer to two decimal places.
Answer:
Explanation:
$ ? .
8.19, 8.18
NEW QUESTION # 60
A company is reporting under IFRS 7 Financial Instruments: Disclosures for the first time and the directors are concerned about whether this will lead to the disclosure of information that could affect the company's share price.
The company is based in a country that uses the A$ but 40% of revenue relates to export sales to the USA and priced in US$.
When the company reports under IFRS 7 for the first time, the share price is most likely to:
- A. Increase due to greater clarity of information available on the extent of US$ risks and how they are managed.
- B. Either increase or decrease depending on market reaction to new information on how financial risk is managed.
- C. Decrease since investors place a lower value on higher risk businesses.
- D. Stay the same since US$ risk can already be quantified from segmental analysis disclosures included elsewhere in the annual report.
Answer: B
NEW QUESTION # 61
A UK company enters into a 5 year borrowing with bank P at a floating rate of GBP Libor plus 3% It simultaneously enters into an interest rate swap with bank Q at 4.5% fixed against GBP Libor plus 1.5% What is the hedged borrowing rate, taking the borrowing and swap into account?
Give your answer to 1 decimal place.
Answer:
Explanation:
7.5%
NEW QUESTION # 62
A company is deciding whether to offer a scrip dividend or a cash dividend to its shareholders.
Although the company has excellent long-term growth prospects, it is experiencing short-term profit and cash flow problems.
Which of the following statements is most likely to be a reason for choosing the scrip dividend?
- A. It is a way of raising additional finance to promote future growth.
- B. It is a way of increasing earnings per share.
- C. It is a way of increasing dividend per share.
- D. It is a way of encouraging shareholders to allow cash to be retained in the business.
Answer: D
NEW QUESTION # 63
Two unlisted companies TTT and YYY are being valued. The companies have similar capital structures and risk profiles and operate in the same industry sector It is easier to value TTT than to value YYY because there have recently been several well-publicised private sales of TTT shares.
Relevant company data:
What is the best estimate of YYY's share price?
- A. $0.94
- B. $1.20
- C. $0.68
- D. $0.60
Answer: B
NEW QUESTION # 64
A company has 6 million shares in issue. Each share has a market value of $4.00.
$9 million is to be raised using a rights issue.
Two directors disagree on the discount to be offered when the new shares are issued.
* Director A proposes a discount of 25%
* Director B proposes a discount of 30%
Which THREE of the following statements are most likely to be correct?
- A. The theoretical ex-rights price will be higher under Director B's proposal than under Director A's proposal.
- B. Shareholder wealth will be higher under Director A's proposal than under Director B's proposal.
- C. The rights issue price will be $3.00 under Director A's proposal.
- D. More shares will be issued under Director B's proposal than under Director A's proposal.
- E. The terms of the rights issue will be one new share for every two existing shares under Director A's proposal.
Answer: C,D,E
NEW QUESTION # 65
A company is considering either exporting its product directly to customers in a foreign country or establishing a manufacturing subsidiary in that country.
The corporate tax rate in the company's own country is 20% and 25% tax depreciation allowances are available.
Which THREE of the following would be considered advantages of establishing the subsidiary in the foreign country?
- A. There are high customs duties payable on products entering the foreign country.
- B. There are restrictions on companies wishing to remit profit from the foreign country.
- C. Year 1 tax depreciation allowances of 100% are available in the foreign country.
- D. There is a double tax treaty between the company's domestic country and the foreign country.
- E. The corporate tax rate in the foreign country is 40%.
Answer: A,C,D
NEW QUESTION # 66
Companies A, B, C and D:
* are based in a country that uses the K$ as its currency.
* have an objective to grow operating profit year on year.
* have the same total levels of revenue and cost.
* trade with companies or individuals in the eurozone. All import and export trade with companies or individuals in the eurozone is priced in EUR.
Typical import/export trade for each company in a year are as follows:
Which company's growth objective is most sensitive to a movement in the EUR/K$ exchange rate?
- A. Company B
- B. Company D
- C. Company A
- D. Company C
Answer: A
NEW QUESTION # 67
The value of a call option will increase because of:
- A. A decrease in the market value of the share
- B. A decrease in the volatility of the share.
- C. An increase in the strike price.
- D. An increase in the time to expiry.
Answer: A
NEW QUESTION # 68
XYZ has a variable rate loan of $200 million on which it is paying interest of Liber ' 3%.
XYZ entered into a swap with AG bank to convert this to a fixed rate 8% loan. AB bank charges an annual commission of 0.4% for making this arrangement Calculate the net payment from KYZ to AB bank at the end of the first year if Libor was 2% throughout the year.
Give your answer in $ million, to one decimal place.
Answer:
Explanation:
22.8
NEW QUESTION # 69
An all equity financed company plans an issue of new ordinary shares to the general public to raise finance for a new project The following data applies:
* 10 million ordinary shares are currently in issue with a market value of S3 each share
* The new project will cost S2.88 million and is expected to give a positive NPV of S1 million
* The issue will be priced at a AaA discount to the current share price.
What gam or loss per share will accrue to the existing shareholders?
- A. Gain of $0.08
- B. Loss of $0.08
- C. Gain of 0.18
- D. Loss of $0.18
Answer: A
NEW QUESTION # 70
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