Cima F3 Exam Question No 11

Question No 11:

A listed company is planning to raise $21.6 million to finance a new project with a positive net present value of $5 million. The finance is to be raised via a rights issue at a 10% discount to the current share price. There are currently 100 million shares in issue, trading at $2.00 each.
Taking the new project into account, what would the theoretical ex-rights price be?
Give your answer to two decimal places.
$ ?

Answer: 2.02, 2.03

Cima F3 Exam Question No 10

Question No 10:

A profit-seeking company intends to acquire another company for a variety of reasons, primarily to enhance shareholder wealth.
Which THREE of the following offer the greatest potential for enhancing shareholder wealth?

A. Achieving more press coverage for the company.
B. Creating new opportunities for employees.
C. Achieving greater cultural diversity.
D. Acquiring Intellectual Property assets.
E. Exploiting production synergies.
F. Elimination of existing competition.

Answer: D, E, F

Cima F3 Exam Question No 9

Question No 9:

When valuing an unlisted company, a P/E ratio for a similar listed company may be used but adjustments to the P/E ratio may be necessary.
Which THREE of the following factors would justify a reduction in the proxy p/e ratio before use?  

A. The relative lack of marketability of unlisted company shares.
B. A lower level of scrutiny and regulation for unlisted companies.
C. Unlisted companies being generally smaller and less established.
D. Control premium not being included within the proxy p/e ratio used.
E. The forecast earnings growth being relatively higher in the unlisted company.
F. A profit item within the unlisted company's latest earnings which will not reoccur.

Answer: A, B, C

Cima F3 Exam Question No 8

Question No 8:

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%.

A. Interest cover will fall; P/E ratio will fall.
B. Interest cover will fall; P/E ratio will rise.
C. Interest cover will rise; P/E ratio will rise.
D. Interest cover will rise; P/E ratio will fall.

Answer: B

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