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CIMA CIMAPRA19-F03-1 exam covers investment appraisal, which involves the evaluation of investment opportunities to determine their potential for generating returns. This section covers various techniques such as net present value, internal rate of return, and payback period. The third section covers risk management and corporate finance, which involves the management of financial risk and the identification of opportunities to maximize shareholder value.
CIMA F3 Exam is a challenging and prestigious qualification that demonstrates a candidate's ability to develop and implement effective financial strategies for businesses. Passing the F3 Exam is an important step towards gaining the CIMA Professional Qualification and becoming a Chartered Management Accountant. With this qualification, candidates can open up a range of career opportunities in financial management, strategic planning, and business consulting.
CIMA CIMAPRA19-F03-1 (F3 Financial Strategy) Exam is a crucial component of the Chartered Institute of Management Accountants (CIMA) qualification. F3 exam assesses candidates' ability to analyze and evaluate financial information, make strategic decisions, and manage financial risks. It is one of the four exams that comprise the CIMA Professional Qualification, which is recognized globally and highly respected by employers in the finance industry.
NEW QUESTION # 81
Company A plans to acquire Company B.
Both firms operate as wholesalers in the fashion industry, supplying a wide range of ladies' clothing shops.
Company A sources mainly from the UK, Company B imports most of its supplies from low-income overseas countries.
Significant synergies are expected in management costs and warehousing, and in economies of bulk purchasing.
Which of the following is likely to be the single most important issue facing Company A in post-merger integration?
- A. Identifying and removing surplus staff.
- B. Discussions with anti-poverty campaigning groups.
- C. Understanding the management information system of the acquired firm.
- D. Discussions with representatives from key customer accounts.
Answer: C
NEW QUESTION # 82
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?
- A. Venture capitalists normally expect an exit strategy sconer than the planned IPO in 10 years'time.
- B. Venture capitalists normally expect at least one seat on the board.
- C. Venture capitalists only provide equity finance and will therefore not be interested in providing a combination of debt and equity finance.
- D. Venture capitalists always require ownership of more than 50% of the shares in a company to ensure control.
- E. The venture capital finance offered is much more expensive than expected.
Answer: A,B,E
NEW QUESTION # 83
A company is wholly equity funded. It has the following relevant data:
* Dividend just paid $4 million
* Dividend growth rate is constant at 5%
* The risk free rate is 4%
* The market premium is 7%
* The company's equity beta factor is 1.2
Calculate the value of the company using the Dividend Growth Model.
Give your answer in $ million to 2 decimal places.
Answer:
Explanation:
$ ? million
56.76, 56.75
NEW QUESTION # 84
Company AAB is located in country A whose currency is the AS It has a subsidiary, BBA, located m country B that has the BS as its currency AAB has asked BBA to pay BS40 million surplus funds to AAB to assist with a planned new capital investment in country A The exchange rate today is AS1 = BS3 Tax regimes
* Company BBA pays withholding tax of 25% on all cash remitted to the parent company
* Company AAB pays tax of 10% on at cash received from its subsidiary
How much will company AAB have available for investment after receiving the surplus funds from BBA?
- A. A$ 27 million
- B. A$ 81 million
- C. A$ 9 million
- D. A$ 12 million
Answer: C
NEW QUESTION # 85
Company A is unlisted and all-equity financed. It is trying to estimate its cost of equity.
The following information relates to another company, Company B, which operates in the same industry as Company A and has similar business risk:
Equity beta = 1.6
Debt:equity ratio 40:60
The rate of corporate income tax is 20%.
The expected premium on the market portfolio is 7% and the risk-free rate is 5%.
What is the estimated cost of equity for Company A?
Give your answer to one decimal place.
? %
Answer:
Explanation:
12.3, 12.30
NEW QUESTION # 86
A company has announced a rights issue of 1 new share for every 4 existing shares.
Relevant data:
* The current market price per share is $10.00.
* Rights are to be issued at a 20% discount to the current price.
* The rate of return on the new funds raised is expected to be 10%.
* The rate of return on existing funds is 5%.
What is the yield-adjusted theoretical ex-rights price?
Give your answer to two decimal places.
$ ?
Answer:
Explanation:
11.20, 11.2
NEW QUESTION # 87
A company's annual dividend has grown steadily at an annual rate of 3% for many years. It has a cost of equity of 11%. The share price is presently $64.38.
The company is about to announce its latest dividend, which is expected to be $5.00 per share.
The Board of Directors is considering an attractive investment opportunity that would have to be funded by reducing the dividend to $4.50 per share. The board expects the project to enable future dividends to grow by 5% every year and the cost of equity to remain unchanged.
Calculate the change in share price, assuming that the directors announce their intention to proceed with this investment opportunity.
Give your answer to 2 decimal places.
$ ?
Answer:
Explanation:
14.37
NEW QUESTION # 88
Where a company acquires another company, which THREE of the following offer the greatest potential for enhancing shareholder wealth?
- A. Elimination of existing competition.
- B. Achieving more press coverage for the company
- C. Acquiring intellectual property assets
- D. Exploiting production synergies.
- E. Achieving greater cultural diversity
- F. Creating new opportunities for employees.
Answer: A,C,D
Explanation:
The items that most clearly enhance shareholder wealth are those that increase future cash flows or create valuable strategic assets:
D). Exploiting production synergies - cost savings / higher margins.
E). Elimination of existing competition - greater pricing power and market share.
F). Acquiring intellectual property assets - unique products, barriers to entry, licensing income.
NEW QUESTION # 89
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. AS32, 051
- B. AS31, 482
- C. AS32, 532
- D. AS31, 790
Answer: A
NEW QUESTION # 90
A company has accumulated a significant amount of excess cash which is not required for investment for the foreseeable future.
It is currently on deposit, earning negligible returns.
The Board of Directors is considering returning this excess cash to shareholders using a share repurchase programme.
The majority of shareholders are individuals with small shareholdings.
Which THREE of the following are advantages of the company undertaking a share repurchase programme?
- A. The earnings per share should increase for the shareholders who do not sell their shares.
- B. Individual shareholders can realise their investment if they wish.
- C. It reduces excess cash which might have been attractive to predators.
- D. It reduces the amount of cash for potential future investment opportunities.
- E. Institutional investors generally prefer a constant predictable income in the form of dividends.
Answer: A,B,C
Explanation:
A - Shareholders who want cash can sell into the repurchase.
B - Fewer shares in issue # higher EPS for remaining shareholders.
C - Reduces surplus cash that might attract predators.
NEW QUESTION # 91
Company A is planning to acquire Company B.
Both companies are listed and are of similar size based on market capitalisation No approach has yet been made to Company B's shareholders as the directors of Company A are undecided about the most suitable method of financing the offer Two methods are under consideration a share exchange or a cash offer financed by debt.
Company A currently has a gearing ratio (debt to debt plus equity) of 30% based on market values. The average gearing ratio (debt to debt plus equity) for the industry is 50% Although no formal offer has been made there have been market rumours of the proposed bid. which is seen as favorable to Company A.
As a consequence. Company As share price has risen over the past few weeks while Company B's share price has fallen.
Which THREE of the following statements are most likely to be correct?
- A. Company A's gearing will increase following a share exchange.
- B. Company A's weighted average cost of capital will fall if financing is with debt
- C. The method of finance chosen will not affect the post-acquisition earning per share of the combined business
- D. Based on current share price movements, a share exchange would mean Company A has to issue fewer shares to acquire Company B than it would have done a few weeks ago
- E. Company B's shareholders will be able to participate in the future growth of the combined business if it is a share exchange
Answer: B,D
NEW QUESTION # 92
Company B is an all equity financed company with a cost of equity of 10%.
It is considering issuing bonds in order to achieve a gearing level of 20% debt and 80% equity.
These bonds will pay a coupon rate of 5% and have an interest yield of 6%.
Company B pays corporate tax at the rate of 25%.
According to Modigliani and Miller's theory of capital structure with tax, what will be Company B's new cost of equity?
A)
B)
C)
D)
- A. Option D
- B. Option C
- C. Option A
- D. Option B
Answer: D
NEW QUESTION # 93
An entity prepares financial statements to 30 June.
During the year ended 30 June 20X2 the following events occurred:
1 July 20X1
* The entitiy borrowed $100 million at a variable rate of interest.
* In order to protect itself against the variability of its interest cashflows, the entity entered into a pay-fixed-receive-variable interest swap with annual settlements. The fair value of the swap on this date was zero.
30 June 20X2
* The entity received 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 entity decides 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. $2 million is recognised in profit or loss and $5 million is recognised in other comprehensive income.
- C. $5 million is recognised in profit or loss and $2 million is recognised in other comprehensive income.
- D. $7 million is recognised in other comprehensive income.
Answer: B
NEW QUESTION # 94
Company A operates in country A and uses currency AS. It is looking to acquire Company B which operates in country B and uses currency B$. The following information is relevant:
The assistant accountant at Company A has prepared the following valuation of company B's equity, however there are some errors in his calculations.
Value of Company B's equity = 14.16 + 16.03 + 17.67 = AS47.86 million
Company B has BS5 million of debt finance.
Which of the following THREE statements are true?
- A. The calculations show Company B's entity value, not its equity value.
- B. The forecast exchange rates are incorrect as they show the BS strengthening and it should be weakening.
- C. The conversion into AS is incorrect as the assistant accountant should have divided by the exchange rate and not multiplied.
- D. The valuation is understated because forecast cash flows beyond year 3 have been ignored.
- E. Cash flow to all investors should be discounted at Company B's cost of equity of 10% rather than its WACC of 8%.
Answer: B,D,E
NEW QUESTION # 95
An analyst has valued a company using the free cash flow valuation model.
The analyst used the following data in determining the value:
* Estimated free cashflow in 1 year's time = $100,000
* Estimated growth in free cashflow after the first year = 5% each year indefinitely
* Appropriate cost of equity = 10%
The result produced by the analyst was as follows:
Value of equity = $100,000 (1+0.05)/0.10 = $1,050,000
The analyst made a number of errors in determining the value.
By how much has the analyst undervalued the company?
- A. $2,000,000
- B. $2,100,000
- C. $1,050,000
- D. $950,000
Answer: D
NEW QUESTION # 96
Company A is unlisted and all-equity financed. It is trying to estimate its cost of equity.
The following information relates to another company, Company B, which operates in the same industry as Company A and has similar business risk:
Equity beta = 1.6
Debt:equity ratio 40:60
The rate of corporate income tax is 20%.
The expected premium on the market portfolio is 7% and the risk-free rate is 5%.
What is the estimated cost of equity for Company A?
Give your answer to one decimal place.
Answer:
Explanation:
? %
12.3, 12.30
NEW QUESTION # 97
The Treasurer of Z intends to use interest rate options to set an interest rate cap on Z's borrowings.
Which of the following statement is correct?
- A. The cost of a collar is lower than the cost of a cap a one.
- B. The Treasurer should buy an interested rate floor and sell an interested cap ta the same time
- C. The Treasurer will have to negotiate the options with Z's bank.
- D. The Treasurer will retain the benefit of movements in interest rates below the floor limit.
Answer: A
Explanation:
(A) describes a collar, not a pure cap. With a collar you sell a floor and buy a cap; that reduces the premium cost. (B) is wrong because with a collar you don't benefit from rates falling below the floor. (D) is not necessarily true - options can be traded via markets or other counterparties, not just the company's bank.
NEW QUESTION # 98
A company which is forecast to experience a strong growth in its profitability is evaluating a potential bond issue.
Which of the following changes in corporate income tax and in bond yields would make the bond issue more attractive to the company?
- A. An increase in corporate tax and an increase in bond yields.
- B. A decrease in corporate tax and a decrease in bond yields.
- C. An increase in corporate tax and a decrease in bond yields.
- D. A decrease in corporate tax and an increase in bond yields.
Answer: C
Explanation:
Debt becomes more attractive when:
Corporate tax increases # larger tax shield on interest.
Bond yields decrease # lower pre-tax cost of debt.
So the combination that makes a bond issue more attractive is higher tax and lower yields.
NEW QUESTION # 99
A national airline has made an offer to acquire a smaller airline in the same country.
Which of the following would be of most concern to the competition authorities?
- A. After the acquisition the board propose to increase prices significantly on routes where no other airlines operate.
- B. The board informed a major institutional shareholder about the proposed acquisition before informing other shareholders.
- C. The acquisition is likely to result in significant redundancies of staff currently working for the smaller airline.
- D. After the acquisition the board propose to reduce the number of flight destinations from the country.
Answer: A
Explanation:
Competition authorities are mainly concerned with market power and abuse of dominance.
Proposing to increase prices significantly on routes where no other airlines operate (i.e. monopoly routes) is a classic competition concern # C.
Reducing destinations (A), selective disclosure to shareholders (B), or redundancies (D) are governance, disclosure, or employment issues, not the core focus of competition law.
NEW QUESTION # 100
A company intends to sell one of its business units, Company R by a management buyout (MBO).
A selling price of $100 million has been agreed.
The managers are discussing with a bank and a venture capital company (VCC) the following financing proposal:
The VCC requires a minimum return on its equity investment in the MBO of 30% a year on a compound basis over 5 years.
What is the minimum TOTAL equity value of Company R in 5 years time in order to meet the VCC's required return?
Give your answer to one decimal place.
$ ? million
Answer:
Explanation:
111.4, 111,
111.0, 111.1, 111.2,
111.3, 111.5, 111.6,
111.7
NEW QUESTION # 101
M is an accountant who wishes to take out a forward rate agreement as a hedging instrument but the company treasurer has advised that a short-term interest rate future would be a better option.
Which of the following is true of a short-term interest rate future?
- A. It interest rates have gone down the price of the future will have fallen.
- B. It can be tailored to the exact reeds of the company.
- C. It must be kept for ne whole duration of the contract
- D. The date is flexible and the position can be closed quickly and easily.
Answer: C
NEW QUESTION # 102
A manufacturing company is based in Country L whose currency is the L$.
One of the company's products is exported to Country M, a rapidly growing economy, whose currency is the M$.
In the most recent financial year:
* 100,000 units of the product were sold to customers in country M
* The unit selling price was M$12
The spot rate today is L$1 = M$5
The company has an objective of growth in total sales value in L$ of 10% a year.
If the L$ strengthens by 5% next year against the M$, what volume of sales of this product is needed next year to achieve the objective?
- A. 115,500 units
- B. 104,500 units
- C. 110,000 units
- D. 105,000 units
Answer: A
Explanation:
Current year sales in M$
Units = 100,000
Price = M$12
Revenue = 100,000 × 12 = M$1,200,000
Convert to L$ at current rate
Spot: L$1 = M$5 # 1 M$ = 0.2 L$
Current L$ revenue = 1,200,000 × 0.2 = L$240,000
Target L$ revenue (10% growth)
240,000 × 1.10 = L$264,000
Effect of a 5% strengthening of the L$
L$ strengthens # more M$ per L$
New rate = 5 × 1.05 = M$5.25 per L$
1 M$ = 1/5.25 # 0.190476 L$
Required units next year
L$ revenue = Units × 12 M$ × 0.190476 L$/M$
So Units = 264,000 ÷ (12 × 0.190476)
12 × 0.190476 # 2.285712
Units # 264,000 ÷ 2.285712 # 115,500 units
So the correct choice is A. 115,500 units.
NEW QUESTION # 103
A company's Board of Directors is assessing the likely impact of financing new projects by using either debt or equity finance.
The impact of using debt or equity finance on some key variables is uncertain.
Which THREE of the following statements are true?
- A. Retained earnings is the cheapest form of equity finance.
- B. The use of debt finance is always preferable to equity finance.
- C. The use of equity finance reduces the company's overall financial risk.
- D. The use of equity finance will create pressure for increases in dividend per share in the future.
- E. The use of debt finance increases the cost of equity.
- F. The use of debt finance will always result in an increase in earnings per share.
Answer: C,D,E
Explanation:
A). Equity instead of debt reduces financial risk # # True
B). Equity will create pressure for higher future DPS # too strong / not necessarily always # #
C). Debt always increases EPS # only if returns > cost of debt # #
D). Retained earnings is the cheapest form of equity finance (no issue costs) # # True
E). More debt # higher financial risk # higher cost of equity (MM with gearing) # # True
F). Debt is always preferable # clearly #
Correct three:
A, D, E\boxed{A,\ D,\ E}A, D, E
NEW QUESTION # 104
A company is considering hedging the interest rate risk on a 3-year floating rate borrowing linked to the
12-month risk-free rate.
If the 12-month risk-free rate for the next three years is 2%, 3% and 4%, which of the following alternatives would result in the lowest average finance cost for the company over the three years?
- A. Enter into an interest rate swap at 3.1% fixed against 12-month risk-free rate.
- B. Enter into a zero-cost collar with a floor of 2.9% and a ceiling of 4%.
- C. Do not hedge.
- D. Enter into an interest rate cap at an annual premium of 0.533% and a cap of 3%,
Answer: C
NEW QUESTION # 105
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