[Jan 16, 2022] CIMA F3 Real Exam Questions and Answers FREE
Pass CIMA F3 Exam Info and Free Practice Test
NEW QUESTION 105
Company A is located in Country A, where the currency is the A$.
It is listed on the local stock market which was set up 10 years ago.
It plans a takeover of Company B, which is located in Country B where the currency is the B$, and where the stock market has been operating for over 100 years.
Company A is considering how to finance the acquisition, and how the shareholders of Company B might respond to a share exchange or cash (paid in B$).
Which of the following is likely to explain why the shareholders of Company B would prefer a share exchange as opposed to a cash offer?
- A. They would receive shares in a market that is likely to be more efficient.
- B. It would avoid them being exposed to foreign currency risk.
- C. It would allow them to realise their investment and make a capital gain.
- D. It would enable them to benefit from the future performance of the combined entity.
Answer: D
NEW QUESTION 106
The directors of a multinational group have decided to sell off a loss-making subsidiary and are considering the following methods of divestment:
1. Trade sale to an external buyer
2. A management buyout (MBC)
The MDO team and the external buyer have both offered the same price to the parent company for the subsidiary.
Which of the following is an advantage to the parent company of opting for a MBO compared to a trade sale as the preferred method of divestment?
- A. Raise the cash more quickly.
- B. Retain the know edge of key management.
- C. Avoid a hostile reaction from key management.
- D. Focus on the core competencies of the business
Answer: C
NEW QUESTION 107
Company A is a listed company that produces pottery goods which it sells throughout Europe. The pottery is then delivered to a network of self employed artists who are contracted to paint the pottery in their own homes.
Finished goods are distributed by network of sales agents.The directors of Company A are now considering acquiring one or more smaller companies by means of vertical integration to improve profit margins.
Advise the Board of Company A which of the following acquisitions is most likely to achieve the stated aim of vertical integration?
- A. A pottery factory in the Middle East.
- B. A company that produces accessories.
- C. A listed international logistics firm.
- D. A company in a similar market to Company A.
Answer: C
NEW QUESTION 108
Which of the following statements best describes a residual dividend policy?
- A. Dividends are paid only after the on-going operational needs of the business have been met.
- B. Dividends are paid only if no further positive NPV projects are available.
- C. All surplus earnings are invested back into the business.
- D. Dividends are paid at a constant rate.
Answer: B
NEW QUESTION 109
Company R is a well-established, unlisted, road freight company.
In recent years R has come under pressure to improve its customer service and has had some cusses in doing this However, the cost of improved service levels has resulted In it marketing small losses in its latest financial year. This is the forest time R has not been profitable.
R uses a' residual divided policy ad has paid dividends twice in the last 10 years.
Which of the following methods would be most appropriate for valuating R?
- A. Valuing the tangible assets and intangible assets of R.D. The P/E method, adjusting the P/E of a listed company downwards to reflect R's unlisted status.
- B. The divided valuation mode.
- C. The earnings yield method, adjusting the earnings yield of a listed company downloads to reflect R's unlisted status.
Answer: A
NEW QUESTION 110
A UK based company is considering investing GBP1 ,000,000 in a project it the USA. It is anticipated that the project will yield net cash inflows of USD580.000 each year for the next three years. These surplus cash flows will be remitted to the UK at the end of each year.
Currently GBP1.00 is worth USD1.30.
The expected inflation rates in the two countries ever the next four years are 2% in the UK and 4% in the USA.
Applying the purchasing power parity theory, which of the following represents the expected remittance at the end of year three, in GBP whole the nearest whole GBP)?
- A. GBP472,916
- B. GBP546,547
- C. GBP450,906
- D. GBP568,846
Answer: C
NEW QUESTION 111
Company C invests heavily in Research and Development an need to raise $45 million to finance future projects. It has decided to use equity finance raised by a tender offer, The following tender offers have been received from potential investors:
Company C wishes to select an offer price that will project shareholders from a significant dilution of control but still raise the required amount of finance.
What offer price should Company C's select?
- A. $4.25
- B. $4.75
- C. $4.50
- D. $4.00
Answer: C
NEW QUESTION 112
Company M plans to bid for Company J.
Company M has 20 million shares in issue and a current share price of $10.00 before publicly announcing the planned takeover. Company J has 10 million shares in issue and a current share price of $4.00.
The directors of Company M are considering an all-share bid of 1 Company M shares for 2 Company J shares.
Synergies worth $20m are expected from the acquisition.
What is the likely change in wealth for Company M's shareholders (in total) if the bid is accepted?
Give your answer to the nearest $ million.
$ ? million
Answer:
Explanation:
8
NEW QUESTION 113
The following information relates to Company A's current capital structure:
Company A is considering a change in the capital structure that will increase gearing to 30:70 (Debt:Equity).
The risk -free rate is 3% and the return on the market portfolio is expected to be 10%.
The rate of corporate tax is 25%
Using the Capital Asset Pricing Model, calculate the cost of equity resulting from the proposed change to the capital structure.
- A. 9.3%
- B. 12.3%
- C. 10.1%
- D. 11.4%
Answer: B
NEW QUESTION 114
MAN is a manufacturing company that is based in country M and sells almost exclusively to customers in country M, priced in the local currency, M$.
MAN wishes to expand the business by acquiring a company that manufactures similar products but has a more global customer base. It is particularly interested in selling to customers in country P, which uses currency P$ but recognises that the P$ is generally quite volatile against the M$.
Country P uses the same language as country M, has free entry of labour from country M, no exchange controls or withholding tax and a favourable double tax treaty.
Which of the following companies would be most suitable takeover candidates for MAN to investigate further?
- A. A company based in country M with a global customer base including country P.
- B. A company based in country P with a global customer base including country P.
- C. A company based in country M with a shared interest in selling in country P.
- D. A company based in country P with a large proportion of customers in country M.
Answer: B
NEW QUESTION 115
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 rise; P/E ratio will fall.
- C. Interest cover will fall; P/E ratio will rise.
- D. Interest cover will fall; P/E ratio will fall.
Answer: C
NEW QUESTION 116
Which THREE of the following long term changes are most likely to increase the credit rating of a company?
- A. A decrease in the dividend cover ratio.
- B. A decrease in the (Book value of debt) / (Book value of equity) ratio.
- C. A decrease in the (Net debt) / (Earnings before interest, tax, depreciation and amortisation) ratio.
- D. An increase in the free cashflow generated from operations.
- E. An increase in the interest cover ratio.
Answer: C,D,E
NEW QUESTION 117
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 Treasurer should buy an interested rate floor and sell an interested cap ta the same time
- B. The cost of a collar is lower than the cost of a cap a one.
- C. The Treasurer will retain the benefit of movcTcnt3 in interest ratc3 below the floor limit.
- D. The Treasurer will have to negotiate the options with Z's Dark
Answer: B
NEW QUESTION 118
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?
- A. The company could seek alternative sources of finding, such as a reduction in the annual dividend payment, to finance the project.
- B. The directors could proceed will the project because their primary duly is maximise shared older wealth, even if that conflicts with lenders' interest.
- C. The directors could meet with key shareholder to discuss whether they wish the project proceed despite the breach of the covenant
- D. The 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
- E. The project could be foregone if it cannot be funded without breaching the covenant
- F. The company could approach its existing Lenders to negotiate a relaxation of :he conditions imposed by the covenant.
Answer: A,E,F
NEW QUESTION 119
Select the most appropriate divided for each of the following statements:
Answer:
Explanation:
NEW QUESTION 120
Company E is a listed company. Its directors are valuing a smaller listed company, Company F, as a possible acquisition.
The two companies operate in the same markets and have the same business risk.
Relevant data on the two companies is as follows:
Both companies are wholly equity financed and both pay corporate tax at 30%.
The directors of Company E believe they can "bootstrap" Company F's earnings to improve performance.
Calculate the maximum price that Company E should offer to Company F's shareholders to acquire the company.
Give your answer to the nearest $million.
- A. 2,700
- B. 3,150
- C. 1,890
- D. 4,500
Answer: B
NEW QUESTION 121
A large, listed company is planning a major project that should greatly improve its share price in the long term.
These plans require a significant capital cost that the company plans to finance by debt.
All of the debt options being considered are for the same duration of time.
Which of the following sources of debt finance is likely to be the most expensive for the company over the full term of the debt?
- A. Bank loan
- B. A finance lease
- C. Bonds
- D. Convertible bonds
Answer: D
NEW QUESTION 122
Modigliani and Miller are the main proponents of the view that the dividend policy is irrelevant to the value of a company's shares.
They argue that a company that continually reinvests its entire earnings would generate the same shareholder wealth if it engaged in a policy of high dividends and financed its expansion with funds obtained from rights issues.
Which THREE of the following statements are assumptions that are required in order to support this proposition?
- A. There is a multiplicity of corporate and personal income tax rates.
- B. There are no transaction costs involved in the issue of new shares (including rights issues).
- C. The capital markets are efficient markets.
- D. Investors do not always have access to perfect information.
- E. Investors act in a rational manner.
Answer: B,C,E
Explanation:
Discursive_F0
NEW QUESTION 123
A company is planning to repurchase some of its shares. Relevant details are as follows:
* 100 million shares in issue
* Current share price $5
* 5 million shares to be repurchased
* 10% repurchase premium
* Repurchased shares to be cancelled
What would you expect the share price after the repurchase to be?
Give your answer to two decimal places.
Answer:
Explanation:
$ ?
4.97, 4.98
NEW QUESTION 124
Extracts from a company's profit forecast for the next financial year as follows:
Since preparing the forecast, the company has decided to return surplus cash to shareholders by a share repurchase arrangement.
The share repurchase would result in the company purchasing 20% of the 1,250 million ordinary shares currently in issue and canceling them.
Assuming the share repurchase went ahead, the impact on the company's forecast earnings per share will be an increase of:
- A. $0.175
- B. $0.125
- C. $0.100
- D. $0.200
Answer: C
NEW QUESTION 125
A company is owned by its five directors who want to sell the business.
Current profit after tax is $750,000.
The directors are currently paid minimal salaries, taking most of their incomes as dividends.
After the company is sold, directors' salaries will need to be increased by $50,000 each year in total.
A suitable Price/Earnings (P/E) ratio is 7, and the rate of corporate tax is 20%.
What is the value of the company using a P/E valuation?
- A. $4,970,000
- B. $4,900,000
- C. $5,530,000
- D. $5,250,000
Answer: A
NEW QUESTION 126
Company M plans to bid for Company J. Company M has 20 million shares in issue and a current share price of $10.00 before publicly announcing the planned takeover. Company J has 10 million shares in issue and a current share price of $4.00.
The directors of Company M are considering an all-share bid of 1 Company M shares for 2 Company J shares.
Synergies worth $20m are expected from the acquisition.
What is the likely change in wealth for Company M's shareholders (in total) if the bid is accepted?
Give your answer to the nearest $ million.
$ ? million
Answer:
Explanation:
8
NEW QUESTION 127
X exports goods to customers in a number of small countries Asia. At present, X invoices customers in X's home currency.
The Sales Director has proposed that X should begin to invoice in the customers currency, and the Treasurers considering the implications of the proposal.
Which TWO of the following statement are correct?
- A. X may be able to sell the receipts forward.
- B. X will know advance the amount of home currency it will receive for the export sales.
- C. The customer will tear the foreign exchange risk and will only buy from X if they are prepared to accept this.
- D. If the proposal is adopted, X will have a lower effective sales price per unit due to exchange rate fluctuations.
- E. The overseas customers may have difficulty obtaining X's name currency with which to make the purchases, so the Sales Director's proposal may increase sales.
Answer: D,E
NEW QUESTION 128
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