CIMA CIMAPRA19-F03-1 Exam Practice Test Instant Access

Question 1

F Co. is a large private company, the founder holds 60% of the company's share capital and her 2 children each hold 20% of the share capital.

The company requires a large amount of long-term finance to pursue expansion opportunities, the finance is required within the next 3 months. The family has agreed that an Initial Public Offering (IPO) should not be pursued at this time, because it would take up to 12 months to arrange.

The existing shareholders are currently considering raising the required finance from an established Venture Capitalist in the form of debt and equity. The Venture Capitalist has agreed to provide the required finance provided it can earn a return on investment of 25% per year. In addition, the Venture Capitalist requires 60% of the equity capital, a directorship in the company and a veto on all expenditure of a capital or revenue nature above a specified limit.

From the perspective of the family, which of the following are advantages of raising the required finance from the Venture Capitalist?

Select all that apply.

AThe cost of the finance under the Venture Capital investment.

BThe changes in shareholding as a result of the Venture Capital investment.

CThe veto on expenditure above a specified level of a revenue or capital nature.

DThe speed with which the finance can be obtained.

EThe experience of the Venture Capitalist with growing businesses.

Answer : A, C

Question 2

Which THREE of the following statements are correct in respect of the issuance of debt securities.

AA bond issuer must appoint at least one market-maker to ensure that there is a liquid market in its traded bonds.

BThe redemption yield on a corporate bond can be determined by calculating the internal rate of return based on the cash flows arising during the duration of the bond.

CInvestors in traded bonds have an ownership (or equity stake) in the company which issued the bonds.

DA corporate entity coming to the bond market for the first time will find it easier to issue corporate bonds than to arrange a conventional term loan.

EGovernments are the most frequent issuers of bonds and the proceeds are used to fund government expenditure or service the national debt.

Answer : C, D, E

Question 3

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?

ABetter co-operation post divestment.

BEnhanced big data opportunities.

CImproved relationships with management buyout team in the event of a sale to the private equity purchaser.

DHigher price due to synergistic benefits.

Answer : A

Question 4

Company A operates in country A and uses currency AS. It is looking to acquire Company B which operates in country B and uses currency B$. The following information is relevant:

The assistant accountant at Company A has prepared the following valuation of company B's equity, however there are some errors in his calculations.

Value of Company B's equity = 14.16 + 16.03 + 17.67 = AS47.86 million

Company B has BS5 million of debt finance.

Which of the following THREE statements are true?

AThe conversion into AS is incorrect as the assistant accountant should have divided by the exchange rate and not multiplied.

BCash flow to all investors should be discounted at Company B's cost of equity of 10% rather than its WACC of 8%.

CThe valuation is understated because forecast cash flows beyond year 3 have been ignored.

DThe forecast exchange rates are incorrect as they show the BS strengthening and it should be weakening.

EThe calculations show Company B's entity value, not its equity value.

Answer : B, C, D

Question 5

TTT pic is a listed company. The following information is relevant:

TTT pic's board is considering issuing new 6% irredeemable debt to re-purchase equity. This is expected to change TTT pic's debt to equity mix to 40: 60 by market value. The corporate tax rate is 20%.

What will be TTT pic's WACC following this change in capital structure?

A11.66%

B12.67%

C13.43%

D11.09%

Answer : D

Question 6

Which of the following would be a reason for a company to adopt a low dividend pay-out policy?

AHigh profitability

BA lack of alternative sources of finance

CA lack of investment opportunities

DUsing dividends to give a signal to the stock market

Answer : D

Question 7

The financial assistant of a geared company has prepared the following calculation of the company's equity value:

Useful information;

* Tax rate - 20%

* Cost of equity = 12%

* Weighted average cost of capital (WACC) 10%

" Debt finance of the company comprises a $6 million 7% undated bond trading at par Valuation workings.

Which of the following errors has been made by the financial assistant?

AA two year discount factor is incorrect in the perpetuity calculation.

BDiscounting at WACC is incorrect.

CThe 20% tax charge is missing.

DA deduction for debt value is missing.

Answer : D

CIMAPRA19-F03-1 F3 Financial Strategy Exam Practice Test