Cima F3 Exam Question No 7

Question No 7:

Company T is a listed company in the retail sector. Its current profit before interest and taxation is $5 million. This level of profit is forecast to be maintainable in future. Company T has a 10% corporate bond in issue with a nominal value of $10 million. This currently trades at 90% of its nominal value.
Corporate tax is paid at 20%. The following information is available: Which of the following is a reasonable expectation of the equity value in the event of an attempted takeover?

A. $32.0 million
B. $41.6 million
C. $65.0 million
D. $50.2 million

Answer: B

Cima F3 Exam Question No 6

Question No 6:

A company has in a 5% corporate bond in issue on which there are two loan covenants.
• Interest cover must not fall below 3 times
• Retained earnings for the year must not fall below $3.5 million
The Company has 200 million shares in issue.
The most recent dividend per share was $0.04.
The Company intends increasing dividends by 10% next year.
Financial projections for next year are as follows:
Advise the Board of Directors which of the following will be the status of compliance with the loan covenants next year?

A. The company will be in compliance with both covenants.
B. The company will be in breach of both covenants.
C. The company will breach the covenant in respect of retained earnings only.
D. The company will be in breach of the covenant in respect of interest cover only.

Answer: C

Cima F3 Exam Question No 5

Question No 5:

A listed company plans to raise $350 million to finance a major expansion program. The cash flow projections for the program are subject to considerable variability. Brief details of the program 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 favor the bond option.
However, the Chief Accountant has provided arguments for a rights issue. Which TWO of the following arguments in favor of a right issue are correct?

A. The issue of bonds might limit the availability of debt finance in the future.
B. The recent fall in the share price makes a rights issue more attractive to the company.
C. The rights issue will lead to less pressure on the operating cash flows of the program.
D. The WACC will decrease assuming Modigliani and Miller's Theory of Capital Structure without taxes applies.
E. The administrative costs of a rights issue will be lower.

Answer: A, C