Free CIMA F3 Practice Exam with Questions & Answers | Set: 4

A company is currently all-equity financed.

The directors are planning to raise long term debt to finance a new project.

The debt:equity ratio after the bond issue would be 30:60 based on estimated market values.

According to Modigliani and Miller's Theory of Capital Structure without tax, the company's cost of equity would:

Company X is an established, unquoted company which provides IT advisory services.

The company's results and cashflows are growing steadily and it has few direct competitors due to the very specialised nature of it's business. Dividends are predictable and paid annually.

Company P is looking to buy 30% of company X's equity shares.

Which TWO of the following methods are likely to be considered most suitable valuation methods for valuing company P's investment in Company X?

Company A operates in country A with the AS as its functional currency. Company A expects to receive BS500.000 in 6 months' time from a customer in Country B which uses the B$.

Company A intends to hedge the currency risk using a money market hedge

The following information is relevant:

What is the AS value of the BS expected receipt in 6 months' time under a money market hedge?

Company P is a pharmaceutical company listed on an alternative investment market.  

The company is developing a new drug which it hopes to market in approximately six years' time.

Company P is owned and managed by a group of doctors who wish to retain control of the company.  The company operates from leased laboratories with minimal fixed assets. 

Its value comes from the quality of its research staff and their research.

The company currently has one approved drug which generates sufficient cashflow to cover day to day operations but not sufficient for major new research and development.

Company P wish to raise debt finance to develop the new drug. 

Recommend which of the following types of debt finance would be most appropriate for Company P to help finance the development of this new drug. 

Assume today is 31 December 20X1.

 A listed mobile phone company has just launched a new phone which is proving to be a great success.

As a direct result of the product's success, earnings are forecast to increase by:

   • 5% a year in each of years 20X2 – 20X6

   • 3% from 20X7 onwards 

Market analysts were very excited to hear the news of the success of the product and future growth forecasts.

Assuming a semi-efficient market applies, which of the following company valuation methods is likely to give the best estimate of the company's equity value today?

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?

Company A is identical in all operating and risk characteristics to Company B, but their capital structures differ.

Company B is all-equity financed. Its cost of equity is 17%.

Company A has a gearing ratio (debt:equity) of 1:2. Its pre-tax cost of debt is 7%. 

Company A and Company B both pay corporate income tax at 30%.

What is the cost of equity for Company A?

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.

A company has 6 million shares in issue. Each share has a market value of $4.00.

$9 million is to be raised using a rights issue.

Two directors disagree on the discount to be offered when the new shares are issued.

   • Director A proposes a discount of 25% 

   • Director B proposes a discount of 30%

Which THREE of the following statements are most likely to be correct?

A company intends to sell one of its business units, Company R by a management buyout (MBO).

A selling price of $100 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 30% a year on a compound basis over 5 years.

What is the minimum TOTAL equity value of Company R in 5 years time in order to meet the VCC's required return?

Give your answer to one decimal place.

$  ? million