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CIMA CIMAPRA19-F03-1 (F3 Financial Strategy) Certification Exam is a professional certification that is designed to test and validate the financial strategy expertise of candidates. F3 Financial Strategy certification exam is offered by the Chartered Institute of Management Accountants (CIMA), which is a globally recognized professional body that offers qualifications, training, and support to management accountants. The CIMAPRA19-F03-1 exam is one of the several exams that CIMA offers to candidates who want to become certified management accountants.

 

NEW QUESTION # 162
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 will have to negotiate the options with Z's Dark
• B. The Treasurer should buy an interested rate floor and sell an interested cap ta the same time
• C. The cost of a collar is lower than the cost of a cap a one.
• D. The Treasurer will retain the benefit of movements in interest rates below the floor limit.

Answer: C

NEW QUESTION # 163
Company R is a major food retailer. It wishes to acquire Company S, a food manufacturer.
Company S currently supplies many stores owned by Company R with food products that it manufactures.
Company S is of similar size to Company R but has a lower credit rating.
Which of the following is most likely to be a synergistic benefit to R on purchasing S?

• A. Cost savings due to reducing the range of products manufactured by Company S.
• B. Savings due to a reduction in purchase costs and more control over the value chain.
• C. Reduced competition resulting in the ability to raise retail selling prices for food products.
• D. Lower cost of borrowing due to the acquistion of a company with a different credit rating.

Answer: B

NEW QUESTION # 164
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 B
• B. Option C
• C. Option D
• D. Option A

Answer: A

NEW QUESTION # 165
A company has:
* A price/earnings (P/E) ratio of 10.
* Earnings of $10 million.
* A market equity value of $100 million.
The directors forecast that the company's P/E ratio will fall to 8 and earnings fall to $9 million.
Which of the following calculations gives the best estimate of new company equity value in $ million following such a change?
A)

B)

C)

D)

• A. Option B
• B. Option A
• C. Option C
• D. Option D

Answer: B

NEW QUESTION # 166
Company HJK is planning to bid for listed company BNM
Financial data for BNM for the financial year ended 31 December 20X1:

HJK is not forecasting any growth in these figures for the foreseeable future Profit and cost data above should be assumed to be equivalent to cash flow data when answenng this question Which THREE of the following approaches would be most appropriate for HJK to use to value the equity of BNM?

• A. Cash flows of S24 million discounted at the cost of equity
• B. Cash flows of $30 million (= S40 million net of tax at 25%) discounted at WACC minus the value of debt
• C. Share price x number of shares in issue
• D. Cash flows of S14 million discounted at the cost of equity
• E. Share price x number of shares in issue plus retained profits

Answer: B,C,E

NEW QUESTION # 167
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 company in a similar market to Company A.
• D. A listed international logistics firm.

Answer: D

NEW QUESTION # 168
PPP's home currency is the PS. An overseas customer is due to make a payment of A$5,000,000 to PPP in 3 months. The present spot rate is 1PS = 5A$. P can obtain an interest rate of 4% per year on P$ deposits and 6% per year on AS deposits.
Forecast the value of the customer's payment to PPP, in PS, when the payment is made in 3 months' time.
Give your answer to the nearest thousand PS.

Answer:

Explanation:
Pending

NEW QUESTION # 169
A financial services company reported the following results in its most recent accounting period:

The company has an objective to achieve 5% earnings growth each year. The directors are discussing how this objective might be achieved next year.
Revenues have been flat over the last couple of years as the company has faced difficult trading conditions. Revenue is expected to stay constant in the coming year and so the directors are focussing efforts on reducing costs in an attempt to achieve earnings growth next year.
Interest costs will not change because the company's borrowings are subject to a fixed rate of interest.
What operating profit margin will the company have to achieve next year in order to just achieve its 5% earnings growth objective'?

• A. 60.0%
• B. 58.5%
• C. 58.0%
• D. 55.8%

Answer: C

NEW QUESTION # 170
The Board of Directors of a listed company is considering the company's dividend/retentions policy.
The inflation rate in the economy is currently high and is expected to remain so for the foreseeable future.
The board are unsure what impact the high level of inflation might have on the dividend policy.
Which THREE of the following statements are true?

• A. The impact of inflation on the cash flows should be considered when formulating the dividend policy.
• B. Consideration should be given to the fact that shareholders will have a desire for real growth in dividend.
• C. The high inflation rate does not need to be considered when determining the dividend policy.
• D. Retained earnings for reinvestment will have to earn a return in excess of the inflation level.
• E. In periods of high inflation 100% of earnings should always be paid out as dividends so that shareholders can protect their wealth against the impact of inflation.

Answer: A,B,D

NEW QUESTION # 171
Company Z wishes to borrow $50 million for 10 years at a fixed rate of interest.
Two alternative approaches are being considered:
1. Issue a 10 year bond at a fixed rate of 6%, or
2. 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 B is 2.2% a year less expensive
• C. Approach A is 0.5% a year less expensive
• D. Approach B is 2.0% a year less expensive

Answer: A

NEW QUESTION # 172
A listed publishing company owns a subsidiary company whose business activity is training.
It wishes to dispose of the subsidiary company.
The following information is available:

The board of the publishing company believe that the value of the subsidiary company, and hence the value of the equity invested in it, can be determined by calculating the present value of the subsidiary's free cashflows.
Which of the following is the most appropriate discount rate to use when determining the enterprise value of the company?

• A. A WACC that reflects the gearing of the publishing company and the asset beta of a listed company that provides training activities.
• B. A WACC that reflects the gearing of the subsidiary company and the asset beta of a listed company that provides training activities.
• C. A cost of equity that reflects the asset beta of a listed company that provides training activities.
• D. A WACC that the reflects the gearing of the publishing company and the equity beta factor of the publishing company.

Answer: A

NEW QUESTION # 173
HHH Company has a fixed rate loan at 10.0%, but wishes to swap to variable. It can borrow at the risk-free rate +8%. The bank is currently quoting swap rates of 3.1% (bid) and 3.5% (ask). What net rate will HHH Company pay if it enters into the swap?

• A. Risk-free rate +8%
• B. Risk-free rate +6.5%
• C. Risk-free rate +6.9%
• D. Risk-free rate+3.1%

Answer: D

NEW QUESTION # 174
Three companies are quoted on the New York Stock Exchange. The following data applies:

Which of the following statements is TRUE?

• A. Companies A and C have the same business risk
• B. Companies A and B have the same business risk
• C. Companies A and B have the same capital structure
• D. Company A has the greatest business risk

Answer: B

NEW QUESTION # 175
On 1 January:
* Company X has a value of $50 million
* Company Y has a value of $20 million
* Both companies are wholly equity financed
Company X plans to take over Company Y by means of a share exchange. Following the acquisition the post-tax cashflow of Company X for the foreseeable future is estimated to be $8 million each year. The post-acquisition cost of equity is expected to be 10%.
What is the best estimate of the value of the synergy that would arise from the acquisition?

• A. $30 million
• B. $60 million
• C. $100 million
• D. $10 million

Answer: D

NEW QUESTION # 176
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. The method of finance chosen will not affect the post-acquisition earning per share of the combined business
• B. Company A's weighted average cost of capital will fall if financing is with debt
• C. Company B's shareholders will be able to participate in the future growth of the combined business if it is a share exchange
• D. Company A's gearing will increase following a share exchange.
• E. 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

Answer: B,E

NEW QUESTION # 177
AA is considering changing its capital structure. The following information is currently relevant to AA:

The gearing rating raising the new debt finance will be 50%.
Which THREE of the following statement about the impact of AA's change in capital structure are true under Modigliani and Miler's capital structure theory with tax.

• A. The cost of equity will increase above 10%
• B. The cost of debt will increase above 4%
• C. The cost of equity will decrease below 10%
• D. The WACC increase above 7.6
• E. The WACC will decrease below 7.6%
• F. The cost of debt remain unchanged at 4%

Answer: D,E

NEW QUESTION # 178
A project requires an initial outlay of $2 million which can be financed with either a bank loan or finance lease.
The company will be responsible for annual maintenance under either option.
The tax regime is:
* Tax depreciation allowances can be claimed on purchased assets.
* If leased using a finance lease, tax relief can be claimed on the interest element of the lease payments and also on the accounting depreciation charge.
The trainee management accountant has begun evaluating the lease versus buy decision and has produced the following data. He is not confident that all this information is relevant to this decision.

Using only the relevant data, which of the following is correct?

• A. The bank loan is $30,000 MORE expensive than the finance lease.
• B. The bank loan is $20,000 LESS expensive than the finance lease.
• C. The bank loan is $70,000 LESS expensive than the finance lease.
• D. The bank loan is $120,000 LESS expensive than the finance lease.

Answer: C

NEW QUESTION # 179
A venture capitalist invests in a company by means of buying:
* 9 million shares for $2 a share and
* 8% bonds with a nominal value of $2 million, repayable at par in 3 years' time.
The venture capitalist expects a return on the equity portion of the investment of at least 20% a year on a compound basis over the first 3 years of the investment.
The company has 10 million shares in issue.
What is the minimum total equity value for the company in 3 years' time required to satisify the venture capitalist's expected return?
Give your answer to the nearest $ million.
$ million.

• A. 34, 35, 34000000, 35000000
• B. 35, 35, 34000000, 35000000

Answer: A

NEW QUESTION # 180
A company with a market capitalisation of S50million is considering raising $1 million debt to fund a new
10-year capital investment protect
The value of this issue is considered to be small in comparison to the company's market capitalisation The company is considering whether to raise the debt finance by either a "bond private placing' or a 'public bond issue.
Which THREE of the following statements are correct?

• A. The company's credit rating will be a key element in determining the interest rate payable and the potential success of either the public bond issue or the bond private placing
• B. An average investor is made aware of a potential initial public bond issue whereas the average investor is only made aware of a bond private placing after it has occurred.
• C. An initial public bond issue does not need to be underwritten whereas a bond private placing must be underwritten.
• D. An initial public bond issue can be arranged relatively quickly whereas a bond private placing can take up to a year to arrange.
• E. An initial public bond issue will be administratively complex and relatively expensive for the relatively small amount of debt being raised whereas a bond private placing will be relatively less complex

Answer: D,E

NEW QUESTION # 181
An aerospace company is planning to diversify into car manufacturing.
Relevant data:

What is the the cost of equity to be used in the WACC for the project appraisal?
Give your answer in percentage, as a whole number.

Answer:

Explanation:
19%

NEW QUESTION # 182
A company is currently all-equity financed.
The directors are planning to raise long term debt to finance a new project.
The debt:equity ratio after the bond issue would be 30:60 based on estimated market values.
According to Modigliani and Miller's Theory of Capital Structure without tax, the company's cost of equity would:

• A. increase or decrease depending on the bond's coupon rate.
• B. decrease.
• C. increase.
• D. stay the same.

Answer: C

NEW QUESTION # 183
A company's dividend policy is to pay out 50% of its earnings.
Its most recent earnings per share was $0.50, and it has just paid a dividend per share of $0.25.
Currently, dividends are forecast to grow at 2% each year in perpetuity and the cost of equity is 10.5%.
In order to grow its earnings and dividends, the company is considering undertaking a new investment funded entirely by debt finance. If the investment is undertaken:
* Its cost of equity will immediately increase to 12% due to the increased finance risk.
* Its earnings and dividends will immediately commence growing at 4% each year in perpetuity.
Which of the following is the expected percentage change in the share price if the new investment is undertaken?

• A. Increase = 8.3%
• B. Increase = 10.5%
• C. Increase = 2%
• D. Decrease = 7.7%

Answer: A

NEW QUESTION # 184
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 share repurchase, if approved by the shareholders, will be binding on all of the company's shareholders.
• C. 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.
• D. The payment of a special dividend could raise shareholders' expectations of similar distributions in the future, unlike a share repurchase.
• E. 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.

Answer: C,D,E

NEW QUESTION # 185
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