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Topics of the CIMA F3: Financial Strategy Exam
CIMA F3 exam dumps included the following topics:
- Financial policy decisions 15%
- Sources of long-term funds 25%
- Financial risks 20%
- Business valuation 40%
Learning guide CIMA F3: Financial Strategy Exam
Exam Blueprint of CIMA F3: Financial Strategy Exam
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NEW QUESTION 123
Assume today is 31 December 20X1.
A listed mobile phone company has just launched a new phone which is proving to be a great success.
As a direct result of the product's success, earnings are forecast to increase by:
* 5% a year in each of years 20X2 - 20X6
* 3% from 20X7 onwards
Market analysts were very excited to hear the news of the success of the product and future growth forecasts.
Assuming a semi-efficient market applies, which of the following company valuation methods is likely to give the best estimate of the company's equity value today?
- A. P/E valuation based on the company's long term P/E and earnings for the year ended 31 December
20X1. - B. Today's share price x number of shares in issue + retained earnings.
- C. Discounted free cash flow using the company's forecast growth rates.
- D. Today's share price x number of shares in issue.
Answer: D
NEW QUESTION 124
A private company was formed five years ago and is currently owned and managed by its five founders. The founders, who each own the same number of shares have generally co-operated effectively but there have also been a number of areas where they have disagreed The company has grown significantly over this period by re-investing its earnings into new investments which have produced excellent returns The founders are now considering an Initial Public Offering by listing 70% of the shares on the local stock exchange Which THREE of the following statements about the advantages of a listing are valid?
- A. Helps access to wider sources of finance.
- B. Provides an exit route for the founders
- C. Increases the profile and reputation of the business.
- D. Reduces agency conflict
- E. Increases dividend payouts
Answer: A,B,C
NEW QUESTION 125
Which TWO of the following statements about debt instruments are correct?
- A. The true cost of servicing debt instruments to the company is the post-tax cost of debt.
- B. A zero coupon will eliminate the tax shield effect on debt payments.
- C. If corporation tax rates rise, the tax shield effect on debenture interest will be reduced.
- D. Changes in corporation tax rates will have no effect on the tax shield of fixed rate debentures.
Answer: B,D
NEW QUESTION 126
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 is a double tax treaty between the company's domestic country and the foreign country.
- B. There are restrictions on companies wishing to remit profit from the foreign country.
- C. The corporate tax rate in the foreign country is 40%.
- D. There are high customs duties payable on products entering the foreign country.
- E. Year 1 tax depreciation allowances of 100% are available in the foreign country.
Answer: A,D,E
NEW QUESTION 127
Company C is a listed company. It is currently considering the acquisition of Company D.
The original founder of Company C currently owns 52% of the shares.
Alternative forms of consideration for Company D being considered are as follows:
* Cash payment, financed by new borrowing
* issue of new shares in Company C
Which of the following is an advantage of a cash offer over a share-for exchange from the viewpoint of the original founder of Company C?
- A. A share-for-share exchange would require the approval of the Competition Authorities but a cash offer would not.
- B. A share for share exchange would result in a significant change in control of Company C whereas a cash offer would not.
- C. A share-for-share exchange would require the approval shareholders in Company C but a cash offer would not.
- D. A cash offer would result in a lower gearing ratio therefore reduce the weighted overage cost of capital whereas a cash offer would not.
Answer: B
NEW QUESTION 128
A company plans to cut its dividend but is concerned that the share price will fall. This demonstrates the _____________ effect
- A. clientele
- B. clientele fall
Answer: A
NEW QUESTION 129
A company gas a large cash balance but its directors have been unable to identify any positive NPV projects to invest in. Which THREE of the following are advantages of a share repurchase, compared with a one-off large dividend?
- A. It increases the number of shares issue.
- B. It returns cash to shareholders so that they can choose hew to spend It
- C. It will not create an expectation for future increased dividends.
- D. The shareholder can choose whether to take the cast or not.
- E. It means that the company will be able to pay lower total dividends in the future.
Answer: B,C,D
NEW QUESTION 130
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?
- A. D
- B. C
- C. B
- D. A
Answer: C
NEW QUESTION 131
NNN is a company financed by both equity and debt. The directors of NNN wish to calculate a valuation of the company's equity and at a recent board meeting discussed various methods of business valuation.
Which THREE of the following are appropriate methods for the directors of NNN to use in this instance?
- A. Cash flow to equity discounted at the cost of equity less the value of debt.
- B. Cash flow to all investors discounted at WACC less the value of debt.
- C. Cash flow to equity discounted at the cost of equity.
- D. Total earnings multiplied by a suitable price-earnings ratio.
- E. Cash flow to all investors discounted at WACC.
Answer: B,C,D
NEW QUESTION 132
A company's gearing is well below its optimal level and therefore it is considering implementing a share re-purchase programme.
This programme will be funded from the proceeds of a planned new long-term bond issue.
Its financial projections show no change to next year's expected earnings.
As a result, the company plans to pay the same total dividend in future years.
If the share re-purchase is implemented, which THREE of the following measures are most likely to decrease?
- A. The Weighted Average Cost of Capital
- B. The number of shares in issue
- C. The cost of equity
- D. Next year's dividend per share
- E. The interest cover
- F. The gearing, based on book value (debt / (debt + equity))
Answer: A,B,E
NEW QUESTION 133
A company wishes to raise additional debt finance and is assessing the impact this will have on key ratios.
The following data currently applies:
* Profit before interest and tax for the current year is $500,000
* Long term debt of $300,000 at a fixed interest rate of 5%
* 250,000 shares in issue with a share price of $8
The company plans to borrow an additional $200,000 on the first day of the year to invest in new project which will improve annual profit before interest and tax by $24,000.
The additional debt would carry an interest rate of 3%.
Assume the number of shares in issue remain constant but the share price will increase to $8.50 after the investment.
The rate of corporate income tax is 30%.
After the investment, which of the following statements is correct?
- A. Interest cover will rise; P/E ratio will rise.
- B. Interest cover will fall; P/E ratio will rise.
- C. Interest cover will fall; P/E ratio will fall.
- D. Interest cover will rise; P/E ratio will fall.
Answer: B
NEW QUESTION 134
A company has a cash surplus which it wishes to distribute to shareholders by a share repurchase rather than paying a special dividend.
Which THREE of the following statements are correct?
- A. Determination of the repurchase price will be easy as shareholders will insist on receiving the open market price.
- B. The payment of a special dividend could raise shareholders' expectations of similar distributions in the future, unlike a share repurchase.
- C. Different tax regimes could result in shareholders having a preference for a share repurchase due to the often more preferential tax treatment of capital gains.
- D. The share repurchase could send a negative signal to shareholders as it could be interpreted as a failure of management to find suitable investment opportunities.
- E. The share repurchase, if approved by the shareholders, will be binding on all of the company's shareholders.
Answer: B,C,D
NEW QUESTION 135
Company Z wishes to borrow $50 million for 10 years at a fixed rate of interest.
Two alternative approaches are being considered:
A: Issue a 10 year bond at a fixed rate of 6%, or B: Borrow from the bank at Libor +2.5% for a 10 year period and simultaneously enter into a 10 year interest rate swap.
Current 10 year swap rates against Libor are 4.0% - 4.2%.
What is the difference in the net interest cost between the two alternative approaches?
- A. Approach A is 0.7% a year less expensive
- B. Approach A is 0.5% a year less expensive
- C. Approach B is 2.2% a year less expensive
- D. Approach B is 2.0% a year less expensive
Answer: A
NEW QUESTION 136
A company currently has a 5.25% fixed rate loan but it wishes to change the interest style of the loan to variable by using an interest rate swap directly with the bank.
The bank has quoted the following swap rate:
* 4.50% - 455% in exchange for Libor
Libor is currently 4%.
If the company enters into the swap and Libor remains at 4%. what will the company's interest cost be?
- A. 4.00%
- B. 5.25%
- C. 4.75%
- D. 4.70%
Answer: A
NEW QUESTION 137
Using the CAPM, the expected return for a company is 10%. The market return is 7% and the risk free rate is 1%.
What does the beta factor used in this calculation indicate about the risk of the company?
- A. It has greater risk than the average market risk.
- B. It has the same risk as the average market risk.
- C. It has lower risk than the average market risk.
- D. It is not possible to tell from CAPM.
Answer: A
NEW QUESTION 138
A listed company plans to raise $350 million to finance a major expansion programme.
The cash flow projections for the programme are subject to considerable variability.
Brief details of the programme have been public knowledge for a few weeks.
The directors are considering two financing options, either a rights issue at a 20% discount to current share price or a long term bond.
The following data is relevant:
The company's share price has fallen by 5% over the past 3 months compared with a fall in the market of 3% over the same period.
The directors favour the bond option.
However, the Chief Accountant has provided arguments for a rights issue.
Which TWO of the following arguments in favour of a right issue are correct?
- A. The administrative costs of a rights issue will be lower.
- B. The rights issue will lead to less pressure on the operating cash flows of the programme.
- C. The issue of bonds might limit the availability of debt finance in the future.
- D. The recent fall in the share price makes a rights issue more attractive to the company.
- E. The WACC will decrease assuming Modigliani and Miller's Theory of Capital Structure without taxes applies.
Answer: B,C
NEW QUESTION 139
Company P is a pharmaceutical company listed on an alternative investment market.
The company is developing a new drug which it hopes to market in approximately six years' time.
Company P is owned and managed by a group of doctors who wish to retain control of the company. The company operates from leased laboratories with minimal fixed assets.
Its value comes from the quality of its research staff and their research.
The company currently has one approved drug which generates sufficient cashflow to cover day to day operations but not sufficient for major new research and development.
Company P wish to raise debt finance to develop the new drug.
Recommend which of the following types of debt finance would be most appropriate for Company P to help finance the development of this new drug.
- A. 5% Bond repayable at par in 7 years' time.
- B. 4% Convertible bond with a conversion ratio of 350 ordinary shares per bond.
- C. 6% Eurobond repayable at par in 5 years' time.
- D. 3% Commercial Paper.
Answer: B
NEW QUESTION 140
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