[2023] Pass CIMAPRA19-F03-1 Exam - Real Questions and Answers
CIMAPRA19-F03-1 Exam Questions Get Updated [2023] with Correct Answers
Topics of the CIMA F3: Financial Strategy Exam
CIMA F3 exam dumps included the following topics:
- Financial policy decisions 15%
- Sources of long-term funds 25%
- Financial risks 20%
- Business valuation 40%
NEW QUESTION 194
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. $1.20
- B. $0.94
- C. $0.60
- D. $0.68
Answer: A
NEW QUESTION 195
Company A plans to diversify by a cash acquisition of Company B an unlisted company in another country (Country B) which operates in a different industrial sector
Company A already manufactures its product in Country B and has a loan denominated in Country B's currency
Company A regularly suffers foreign exchange losses due to volatility in the exchange rate between the two countries' currencies in recent years.
Which THREE of the following appear to be be valid justifications of this diversification decision?
- A. The diversification into another product market will lower business risk
- B. The diversification will give Company A protection from political risk
- C. The diversification will give Company A greater protection from translation risk
- D. The diversification will give Company A greater protection from transaction risk.
- E. The diversification will enable Company A to enjoy production scale economies
Answer: B,C,D
NEW QUESTION 196
PTT has a number of subsidiary companies around the world, including FTT based in Europe and CTT based in Indonesia
CTT purchases all of us raw materials from FTT CTT processes these materials and the resulting products are exported to several different countries CTT pays FTT in the Indonesian currency.
Indonesia's inflation is higher than that of FTTs home country
Which of the following statements are correct?
Select ALL that apply
- A. FTT could ask for ail payments to K to be made in its home currency, which would reduce exposure to currency risk
- B. FTT will be exposed to transaction risks as the Indonesian currency will appreciate over time because of the expected inflation rates
- C. CTT will be exposed to translation risk because FTT will almost certainly have to reflect the changing prices in its selling price and it will be difficult for CTT to make a profit
- D. FTT will be exposed to transaction risk The Indonesian currency that it receives Is likely to decline over time because of anticipated inflation
- E. FTT could investigate whether it could import anything from Indonesia in order to create a natural hedge.
Answer: A,B,D
NEW QUESTION 197
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%.
After the investment, which of the following statements is correct?
- A. Interest cover will rise; 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 fall; P/E ratio will fall.
Answer: B
NEW QUESTION 198
A company has just received a hostile bid. Which of the following response strategies could be considered?
- A. Poison pill strategy
- B. Approach a White Knight
- C. Revalue non-current assets
- D. Change the Articles of Association to amend voting rights
Answer: B
NEW QUESTION 199
A company's current earnings before interest and taxation are $5 million.
These are expected to remain constant for the forseeable future.
The company has 10 million shares in issue which currently trade at $3.60.
It also has a $10 million long term floating rate loan.
The current interest rate on this loan is 5%.
The company pays tax at 20%.
The company expects interest rates to increase next year to 6% and it's Price/Earnings (P/E) ratio to move to 9.5 times by the end of next year.
What percentage reduction in the share price will occur by the end of next year if the interest rate increase and the P/E movement both occur?
- A. Reduction of 5%
- B. Reduction of 0%
- C. Reduction of 7%
- D. Reduction of 1%
Answer: C
NEW QUESTION 200
A company generates and distributes electricity and gas to households and businesses.
Forecast results for the next financial year are as follows:
The Industry Regulator has announced a new price cap of $1.50 per Kilowatt.
The company expects this to cause consumption to rise by 10% but costs would remained unaltered.
The price cap is expected to cause the company's net profit to fall to:
- A. $47.5 million profit
- B. $20.0 million profit
- C. $35.0 million loss
- D. $27.5 million profit
Answer: A
NEW QUESTION 201
WX, an advertising agency, has just completed the all-cash acquisition of a competitor, YZ. This was seen by the market as a positive strategic move byWX.
Which THREE of the following will WX's shareholders expect the company's directors to prioritise following the acquisition?
- A. The development of a dividend policy to meet the expectations of the YZ's shareholders.
- B. The regulatory approval required to complete the acquisition.
- C. The integration and retention of key employees of YZ.
- D. The realisation of anticipated post-acquisition synergies.
- E. The retention of YZ's key customers.
Answer: B,C,D
NEW QUESTION 202
Company W has received an unwelcome takeover bid from Company B.
The offer is a share exchange of 3 shares in Company B for 5 shares in Company W or a cash alternative of $5.70 for each Company W share.
Company B is approximately twice the size of Company W based on market capitalisation. Although the two companies have some common business interested the main aim of the bid is diversification for Company B.
Company W has substantial cash balances which the directors were planning to use to fund an acquisition.
These plans have not been announced to the market.
The following share price information is relevant.
Which of the following would be the most appropriate action by Company W's directors following receipt of this hostile bid?
- A. Refer the bid to the country's competition authorities.
- B. Write to shareholders explaining fully why the company's share price is under valued.
- C. Pay a one-off special dividend.
- D. Change the Articles of Association to increase the percentage of shareholder votes required to approve a takeover.
Answer: B
NEW QUESTION 203
A company plans to cut its dividend but is concerned that the share price will fall. This demonstrates the _____________ effect
- A. clientele fall
- B. clientele
Answer: B
NEW QUESTION 204
WW is a quoted manufacturing company. The Finance Director has addressed the shareholders during WW's annual general meeting-She has told the shareholders that WW raised equity during the year and used the funds to repay a large loan that was maturing, thereby reducing WW's gearing ratio At the conclusion of the Finance Director's speech one of the shareholders complained that it had been foolish for WW to have used equity to repay debt The shareholder argued that the Modigliani and Miller model (with tax) offers proof that debt is cheaper than equity when companies pay tax on their profits.
Which THREE arguments could the Finance Director have used in response to the shareholder?
- A. A lower gearing ratio creates greater flexibility for WW in the future
- B. The shareholder was confusing the cost of capital with shareholder wealth
- C. The Modigliani and Miller model would only be valid in practice if WW's shareholders were aware of the model and believed in its validity
- D. A lower gearing ratio will result in an increase in the value of the company
- E. WW was approaching a debt covenant limit and it was therefore important to reduce gearing.
- F. Reducing the gearing ratio has reduced the financial risk of WW which will benefit shareholders
Answer: D,E,F
NEW QUESTION 205
Company E is a listed company. Its directors are valuing a smaller listed company, Company F, as a possible acquisition.
The two companies operate in the same markets and have the same business risk.
Relevant data on the two companies is as follows:
Both companies are wholly equity financed and both pay corporate tax at 30%.
The directors of Company E believe they can "bootstrap" Company F's earnings to improve performance.
Calculate the maximum price that Company E should offer to Company F's shareholders to acquire the company.
Give your answer to the nearest $million.
- A. 1,890
- B. 3,150
- C. 4,500
- D. 2,700
Answer: B
NEW QUESTION 206
ZZZ is a listed company based in Brinland. a European country. It is the largest owner and operator of residential care homes for elderly people in Brinland
Most of the residential care homes in Brinland are run by small private operators, and the standards of cafe are extremely variable However. 22Z has developed a good reputation because its client service is considered to be extremely good even though its prices are higher than those of most of its competitors.
ZZZ has expanded rapidly in the last few years, partly by acquisition and partly by organic growth consequently, the company's share price now stands at a record high, and the dividend declared at the end of the most recent accounting period was 10% higher than the previous year's dividend.
The Brinland government has recently set up a regulatory body to monitor the residential care homes industry. The regulatory body is considering introducing a variety of regulations to improve the customer experience in the industry. Following a period of consultation and investigation, the regulatory body is expected to announce a range of new regulations in the near future.
The directors of ZZZ are concerned that the new regulations may adversely affect their company
Which THREE of the following new regulations are likely to have the greatest negative impact on ZZTs performance?
- A. Imposition of a minimum staff to client ratio.
- B. Price controls, setting a maximum price that providers can charge
- C. Imposition of a one-off "windfall" tax to fund training courses for carers across the industry
- D. Monopoly controls, forcing large operators to dispose of some care homes
- E. Fines for companies that miss specified service level targets
Answer: A,D,E
NEW QUESTION 207
The ex div share price of Company A's shares is $.3.50
An investor in Company A currently holds 2,000 shares.
Company A plans to issue a script divided of 1 new shares for every 10 shares currently held.
After the scrip divided, what will be the total wealth of the shareholder?
Give your answer to the nearest whole $.
- A. 0
- B. 1
Answer: A
Explanation:
NEW QUESTION 208
Company A needs to raise AS500 mi lion to invest in a new project and is considering using a pub ic issue of bonds to finance the investment.
Which THREE of the following statements-relating to this bond issue are true?
- A. The largest issuer of bond i3 the government.
- B. The bond market is unregulated making it easier to raise finance
- C. A company must be listed before it can issue bones.
- D. Bonds issues in the corporate debt market are underwritten.
- E. Purchasing bonds in the capital markets enables entities to borrow large amounts of finance.
Answer: A,C,E
NEW QUESTION 209
A company in country T is considering either exporting its product directly to customers in country P or establishing a manufacturing subsidiary in country P.
The corporate tax rate in country T is 20% and 25% tax depreciation allowances are available Which TIIRCC of the following would be considered advantages of establishing a subsidiary in country T?
- A. Year 1 tax depreciation allowances of 100% are available in country P.
- B. There are high customs cuties payable of products entering country P.
- C. There is a double tax treaty between country T and country P.
- D. The corporate tsx rate in country P is 40%.
- E. There are restrictions on companies wishing to remit profit from country P
Answer: A,B,C
NEW QUESTION 210
A company is planning a new share issue.
The funds raised will be used to repay debt on which it is currently paying a high interest rate.
Operating profit and dividends are expected to remain unchanged in the near future.
If the share issue is implemented, which THREE of the following are most likely to increase?
- A. The number of shares in issue
- B. Interest cover
- C. Next year's payment of corporate income tax
- D. The gearing (book value of debt as a percentage of the book value of equity + debt)
- E. The cost of equity
Answer: A,C,D
NEW QUESTION 211
Company WWW is considering making a takeover bid for Company KKA Company KKA's current share price is $5.00
Company WWW is considering either
" A cash payment of $5.75 for each share in Company KKA
" A 5 year corporate bond with a market value of $90 in exchange for 15 shares in Company KKA
Calculate the highest percentage premium which Company KKA shareholders will receive.
- A. Cash premium = 10%
- B. Cash premium = 15%
- C. Corporate bond premium = 20%
- D. Corporate bond premium = 80%
Answer: C
NEW QUESTION 212
DFG is a successful company and its shares are listed on a recognised stock exchange. The company's gearing ratio is currently in line with the industry average and the directors of DFG do not want to increase the company's financial risk. The company does not carry a large cash balance and its shareholders are not expected to be willing to support a rights issue at this time LMB is a small services company owned and managed by a small board of directors who are going to retire within the next year DFG wishes to purchase LMB and has approached LMB's owners, who are broadly open to the proposal, to discuss the bid and the consideration to be offered by DFG. LMB's owners explain to DFG that they are also keen to defer any tax liabilities they would be subject to on receipt of the consideration.
Based on the information provided, which of the following types of consideration would be most suitable to finance the acquisition?
- A. DFG shares for a percentage of the current value of LMB plus a three year earn-out arrangement
- B. DFG shares for the current value of LMB
- C. Loan stock in DFG for the current value of LMB
- D. Cash for the current value of LMB
Answer: B
NEW QUESTION 213
Which THREE of the following are considered in detail in IFRS 7 Financial Instruments: Disclosures?
- A. Liquidity risk
- B. Enterprise risk
- C. Credit risk
- D. Business risk
- E. Market risk
Answer: A,C,E
NEW QUESTION 214
On 31 October 20X3:
* A company expected to agree a foreign currency transaction in January 20X4 for settlement on 31 March 20X4.
* The company hedged the currency risk using a forward contract at nil cost for settlement on 31 March 20X4.
* The transaction was correctly treated as a cash flow hedge in accordance with IAS 39 Financial Instruments: Recognition and Measurement.
On 31 December 20X3, the financial year end, the fair value of the forward contract was $10,000 (asset).
How should the increase in the fair value of the forward contract be treated within the financial statements for the year ended 31 December 20X3?
- A. A $10,000 profit will be recognised within the Income Statement.
- B. Not recognised in 20X3 as the forward contract is not settled until after the year end.
- C. Not recognised in 20X3 as the gain will be offset by a loss on the hedged transaction.
- D. A $10,000 profit will be recognised within other comprehensive income.
Answer: D
NEW QUESTION 215
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. 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.
- B. 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
- 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 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
- E. An initial public bond issue can be arranged relatively quickly whereas a bond private placing can take up to a year to arrange.
Answer: D,E
NEW QUESTION 216
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