[Feb-2023 Newly Released] CIMAPRA19-F03-1 Exam Questions For You To Pass [Q151-Q169]

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[Feb-2023 Newly Released] CIMAPRA19-F03-1 Exam Questions For You To Pass

CIMA CIMAPRA19-F03-1 Exam: Basic Questions With Answers

QUESTION 151
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?

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

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.

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

An initial public bond issue does not need to be underwritten whereas a bond private placing must be underwritten.

An initial public bond issue can be arranged relatively quickly whereas a bond private placing can take up to a year to arrange.

QUESTION 152
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?

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

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

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

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

The calculations show Company B’s entity value, not its equity value.

QUESTION 153
AA is considering changing its capital structure. The following information is currently relevant to AA:

The gearing rating raising the new debt finance will be 50%.
Which THREE of the following statement about the impact of AA’s change in capital structure are true under Modigliani and Miler’s capital structure theory with tax.

The cost of debt will increase above 4%

The WACC will decrease below 7.6%

The cost of equity will increase above 10%

The cost of equity will decrease below 10%

The WACC increase above 7.6

The cost of debt remain unchanged at 4%

QUESTION 154
Company X is based in Country A, whose currency is the A$.
It trades with customers in Country B, whose currency is the B$.
Company X aims to maintain its revenue from exports to Country B at 25% of total revenue.
Company A has the following forecast revenue:

The forecast revenue from Country B has assumed an exchange rate of A$1/B$2, that is A$1 = B$2.
If the B$ depreciates against the A$ by 10%, the ratio of revenue generated from Country B as a percentage of total revenue will:

fall to 23.3%.

rise to 27.0%.

rise to 30.3%.

fall to 22.7%.

QUESTION 155
A company has:
* $7 million market value of equity
* $5 million market value of debt
* WACC of 9.375%
* Corporate income tax rate of 15%
According to Modigliani and Miller’s theory of capital structure with tax, what is the ungeared cost of equity?

10.00%

8.79%

14.52%

10.27%

QUESTION 156
A company’s Board of Directors is assessing the likely impact of financing future new projects using either equity or debt.
The directors are uncertain of the effects on key variables.
Which THREE of the following statements are true?

The choice between using either equity or debt will have no impact on the amount of corporate income tax payable.

Retained earnings has no cost, and is therefore the cheapest form of equity finance.

Debt finance is always preferable to equity finance.

Debt finance will increase the cost of equity.

Equity finance will reduce the overall financial risk.

Equity finance will increase pressure to pay a higher total future dividend.

QUESTION 157
Company J plans to acquire Company K, an unlisted company whose equity is to be valued using a P/E ratio approach.
A listed company has been identified which is very similar to Company K and which can be used as a proxy.
However, the growth prospects of Company K are higher than those of the proxy.
The Directors of Company J are aware that certain adjustments will be necessary to the proxy company’s P/E ratio in order to obtain a more reliable valuation.
The following adjustments have been agreed:
* 20% due to Company K being unlisted.
* 15% to allow for the growth rate difference.
The total adjustment to the proxy p/e ratio is:

5% increase

5% decrease

35% increase

35% decrease

QUESTION 158
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?

Reduction of 7%

Reduction of 5%

Reduction of 1%

Reduction of 0%

QUESTION 159
A company wishes to raise new finance using a rights issue. The following data applies:
* There are 10 million shares in issue with a market value of $4 each
* The terms of the rights will be 1 new share for 4 existing shares held
* After the rights issue, the theoretical ex-rights price (TERP) will be $3.80
Assuming all shareholders take up their rights, how much new finance will be raised ?
Give your answer to one decimal place.
$ ? million

7.5, 7.50

7.5, 6.50

QUESTION 160
X exports goods to customers in a number of small countries Asi
a. At present, X invoices customers in X’s home currency.
The Sales Director has proposed that X should begin to invoice in the customers currency, and the Treasurers considering the implications of the proposal.
Which TWO of the following statement are correct?

X may be able to sell the receipts forward.

If the proposal is adopted, X will have a lower effective sales price per unit due to exchange rate fluctuations.

X will know advance the amount of home currency it will receive for the export sales.

The overseas customers may have difficulty obtaining X’s name currency with which to make the purchases, so the Sales Director’s proposal may increase sales.

The customer will tear the foreign exchange risk and will only buy from X if they are prepared to accept this.

QUESTION 161
Company J is in negotiations to acquire Company K and believes it can turn around Company K’s performance to match its own.
The following information is available for the two companies:

Select the maximum price for each share that Company J should place on Company K during negotiations.

$1.7

$2.0

$3.0

$3.2

QUESTION 162
A company has announced a rights issue of 1 new share for every 4 existing shares.
Relevant data:
* The current market price per share is $10.00.
* Rights are to be issued at a 20% discount to the current price.
* The rate of return on the new funds raised is expected to be 10%.
* The rate of return on existing funds is 5%.
What is the yield-adjusted theoretical ex-rights price?
Give your answer to two decimal places.

QUESTION 163
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?

The diversification will give Company A protection from political risk

The diversification into another product market will lower business risk

The diversification will give Company A greater protection from transaction risk.

The diversification will give Company A greater protection from translation risk

The diversification will enable Company A to enjoy production scale economies

QUESTION 164
A company’s main objective is to achieve an average growth in dividends of 10% a year.
In the most recent financial year:

Sales are expected to grow at 8% a year over the next 5 years.
Costs are expected to grow at 5% a year over the next 5 years.
What is the minimum dividend payout ratio in 5 years’ time that would allow the company to achieve its objective?

21.7%

30.0%

27.5%

22.5%

QUESTION 165
Company A is a listed company that produces pottery goods which it sells throughout Europe. The pottery is then delivered to a network of self employed artists who are contracted to paint the pottery in their own homes.
Finished goods are distributed by network of sales agents.The directors of Company A are now considering acquiring one or more smaller companies by means of vertical integration to improve profit margins.
Advise the Board of Company A which of the following acquisitions is most likely to achieve the stated aim of vertical integration?

A company in a similar market to Company A.

A pottery factory in the Middle East.

A company that produces accessories.

A listed international logistics firm.

QUESTION 166
A listed entertainment and media company produces and distributes films globally. The company invests heavily in intellectual property in order to create the scope for future film projects. The company has five separate distribution companies, each managed as a separate business unit The company is seeking to sell one of its business units in a management buy-out (MBO) to enable it to raise finance for proposed new investments The business unit managers have been in discussions with a bank and venture capitalists regarding the financing for the MBO The venture capitalists are only prepared to invest a mixture of debt and equity and have suggested the following:

The venture capitalists have stated that they expect a minimum return on their equity investment of 30% a year on a compound basis over the first 5 years of the MBO No dividends will be paid during this period.
Advise the MBO team of the total amount due to the venture capitalist over the 5-year period to satisfy their total minimum return?

$155.14 million

$111 39 million

$120 14 million

$146 39 million

QUESTION 167
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?

Change the Articles of Association to increase the percentage of shareholder votes required to approve a takeover.

Refer the bid to the country’s competition authorities.

Write to shareholders explaining fully why the company’s share price is under valued.

Pay a one-off special dividend.

QUESTION 168
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?

Better co-operation post divestment.

Enhanced big data opportunities.

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

Higher price due to synergistic benefits.

QUESTION 169
A company wishes to raise new finance using a rights issue. The following data applies:
* There are 10 million shares in issue with a market value of $4 each
* The terms of the rights will be 1 new share for 4 existing shares held
* After the rights issue, the theoretical ex-rights price (TERP) will be $3.80 Assuming all shareholders take up their rights, how much new finance will be raised ?
Give your answer to one decimal place.
$ ? million