Question No 13:
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
Friday, 13 May 2016
Thursday, 21 April 2016
Cima F3 Exam Question No 12
Question No 12:
A company's gearing (measured as debt/(debt + equity)) is currently 60% and it is investigating whether an optimal gearing structure exists within the industry.
It has analysed the capital structure of similar companies in the industry and it would appear that there is evidence supporting the traditional theory of capital structure.
Companies with the lowest WACC in the industry have gearing of around 45% to 50%.
Which of the following actions would result in the company achieving a more optimal capital structure?
A. Undertaking a rights issue of equity to repay some of its debt.
B. Refinancing to replace some of its short term debt with long term debt.
C. Increasing the level of dividend to return more cash to shareholders.
D. Using retained cash to undertake a buyback of some of its equity.
Answer: A
A company's gearing (measured as debt/(debt + equity)) is currently 60% and it is investigating whether an optimal gearing structure exists within the industry.
It has analysed the capital structure of similar companies in the industry and it would appear that there is evidence supporting the traditional theory of capital structure.
Companies with the lowest WACC in the industry have gearing of around 45% to 50%.
Which of the following actions would result in the company achieving a more optimal capital structure?
A. Undertaking a rights issue of equity to repay some of its debt.
B. Refinancing to replace some of its short term debt with long term debt.
C. Increasing the level of dividend to return more cash to shareholders.
D. Using retained cash to undertake a buyback of some of its equity.
Answer: A
Thursday, 7 April 2016
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
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
Thursday, 17 March 2016
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
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
Thursday, 18 February 2016
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
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
Wednesday, 6 January 2016
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
Thursday, 31 December 2015
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
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
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