Updated Jan-2024 Pass F3 Exam - Real Practice Test Questions [Q82-Q98]

Updated Jan-2024 Pass F3 Exam - Real Practice Test Questions

Download Free CIMA F3 Real Exam Questions

NEW QUESTION # 82
A company is considering a divestment via either a management buyout (MBO) or sale to a private equity purchaser. Which of the following is an argument in favour of the MBO from the viewpoint of the original company?

A. Better co-operation post divestment.
B. Improved relationships with management buyout team in the event of a sale to the private equity purchaser.
C. Higher price due to synergistic benefits.
D. Enhanced big data opportunities.

Answer: A

NEW QUESTION # 83
A company is funded by:
* $40 million of debt (market value)
* $60 million of equity (market value)
The company plans to:
* Issue a bond and use the funds raised to buy back shares at their current market value.
* Structure the deal so that the market value of debt becomes equal to the market value of equity.
According to Modigliani and Miller's theory with tax and assuming a corporate income tax rate of 20%, this plan would:

A. increase the market value of the company's equity.
B. decrease the company's equity beta.
C. increase shareholder wealth.
D. increase the company's asset beta.

Answer: C

NEW QUESTION # 84
A company intends to sell one of its business units. Company W, by a management buyout (MBO). A selling price of S200 million has been agreed.
The managers are discussing with a bank and a venture capital company (VCC) the following financing proposal.

The VCC requires a minimum return on its equity investment In the MBO of 35% a year on a compound basis over 5 years What is the minimum total equity value of Company W in 5 years time in order to meet the VCC's required return? Give your answer to one decimal place.

Answer:

Explanation:
65

NEW QUESTION # 85
A company aims to increase profit before interest and tax (PBIT) each year.
The company reports in A$ but has significant export sales priced in B$.
All other transactions are priced in A$.
In 20X1, the company reported:

In 20X2, the only changes expected are:
* An increase in export prices of 10%, but no change to units sold.
* A rise in the value of the B$ to A$/B$ 2.500 (that is, A$ 1 = B$ 2.5) Is it likely that the company would still meet its objective to grow PBIT between 20X1 and 20X2?

A. Yes, PBIT would increase by A$ 48 million.
B. No, PBIT would fall by A$ 48 million.
C. Yes, PBIT would increase by A$ 150 million.
D. No, PBIT would fall by A$ 150 million.

Answer: B

NEW QUESTION # 86
Company Y plans to diversify into an activity where Company X has an equity beta of 1.6, a debt beta of zero and gearing of 50% (debt/debt plus equity).
The risk-free rate of return is 5% and the market portfolio is expected to return 10%.
The rate of corporate income tax is 30%.
What would be the risk-adjusted cost of equity if Company Y has 60% equity and 40% debt?

A. 13%
B. 11.6%
C. 11.9%
D. 9.1%

Answer: C

NEW QUESTION # 87
A company plans a four-year project which will be financed by either an operating lease or a bank loan.
Lease details:
* Four year lease contract.
* Annual lease rentals of $45,000, paid in advance on the 1st day of the year.
Other information:
* The interest rate payable on the bank borrowing is 10%.
* The capital cost of the project is $200,000 which would have to be paid at the beginning of the first year.
* A salvage or residual value of $100,000 is estimated at the end of the project's life.
* Purchased assets attract straight line tax depreciation allowances.
* Corporate income tax is 20% and is payable at the end of the year following the year to which it relates.
A lease-or-buy appraisal is shown below:

Which THREE of the following items are errors within the appraisal?

A. Lease payments are timed incorrectly
B. Using the 10% discount rate is incorrect
C. The bank loan repayments should be included
D. The salvage value has been included within the lease option
E. The project's operating cashflows should be included
F. Tax relief on lease payments have not been lagged correctly

Answer: B,D,F

NEW QUESTION # 88
Two unlisted companies TTT and YYY are being valued. The companies have similar capital structures and risk profiles and operate in the same industry sector It is easier to value TTT than to value YYY because there have recently been several well-publicised private sales of TTT shares.
Relevant company data:

What is the best estimate of YYY's share price?

A. $0.60
B. $1.20
C. $0.68
D. $0.94

Answer: B

NEW QUESTION # 89
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 breach the covenant in respect of retained earnings only.
C. The company will be in breach of both covenants.
D. The company will be in breach of the covenant in respect of interest cover only.

Answer: B

NEW QUESTION # 90
Company BBB has prepared a valuation of a competitor company, Company BBD. Company BBB is intending to acquire a controlling interest in the equity of Company BBD and therefore wants to value only the equity of Company BBD.

The directors of Company BBB have prepared the following valuation of Company BBD:
Value of Equity = 4.63 + 5.14 + 5.56 = S15.33 million
Additional information on Company BBD:

Which THREE of the following are weaknesses of the above valuation?

A. The valuation is understated as the directors have failed to include a perpetuity factor in the calculations.
B. Free cash flows to all investors should be discounted at the cost of equity of 10% rather than WACC of 8%.
C. The valuation is overstated as the directors have failed to deduct tax from the free cash flows.
D. The valuation is understated as forecast future growth has been ignored beyond year 3.
E. The approach used calculates the value of the total entity not the value of equity.

Answer: A,C,E

NEW QUESTION # 91
A company is preparing an integrated report according to the International <IR> Framework as issued by the International Integrated Reporting Council.
Which THREE of the following should be included in the report?

A. The challenges and uncertainties that the organisation is likely to encounter in pursuing its strategy.
B. A comparison of the key elements of its financial statements with those of its main competitor.
C. An explanation of how the organisation's governance structure supports its ability to create value in the short, medium and long term.
D. A summary of the key issues discussed by directors in main board meetings.
E. A detailed analysis of the organisation's business model.

Answer: A,C,E

NEW QUESTION # 92
Company A is planning to acquire Company B by means of a cash offer. The directors of Company B are prepared to recommend acceptance if a bid price can be agreed. Estimates of the net present value (NPV) of future cash flows for the two companies and the combined group post acquisition have been prepared by Company A's accountant. There are as follows:
What is the maximum price that Company A should offer for the shares in Company B?
Give your answer to the nearest $ million

Answer:

Explanation:
150

NEW QUESTION # 93
A company has:
* $6 million market value of equity
* $4 million market value of debt
* WACC of 11.04%
* Corporate income tax rate of 20%
According to Modigliani and Miller's theory of capital structure with tax, what is the ungeared cost of equity?

A. 12.00%
B. 10.16%
C. 16.24%
D. 12.54%

Answer: A

NEW QUESTION # 94
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 are no transaction costs involved in the issue of new shares (including rights issues).
B. Investors act in a rational manner.
C. Investors do not always have access to perfect information.
D. The capital markets are efficient markets.
E. There is a multiplicity of corporate and personal income tax rates.

Answer: A,B,D

Explanation:
Discursive_F0

NEW QUESTION # 95
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 will retain the benefit of movcTcnt3 in interest ratc3 below the floor limit.
C. The cost of a collar is lower than the cost of a cap a one.
D. The Treasurer should buy an interested rate floor and sell an interested cap ta the same time

Answer: C

NEW QUESTION # 96
Company Z has identified four potential acquisition targets: companies A, B, C and D.
Company Z has a current equity market value of $590 million.
The price it would have to pay for the equity of each company is as follows:

Only one of the target companies can be acquired and the consideration will be paid in cash.
The following estimations of the new combined value of Company Z have been prepared for each acquisition before deduction of the cash consideration:

Ignoring any premium paid on acquisition, which acquisition should the directors pursue?