Free CIMA F3 Practice Exam with Questions & Answers | Set: 5

Company A plans to acquire Company B.

Both firms operate as wholesalers in the fashion industry, supplying a wide range of ladies' clothing shops.

Company A sources mainly from the UK, Company B imports most of its supplies from low-income overseas countries.

Significant synergies are expected in management costs and warehousing, and in economies of bulk purchasing.

Which of the following is likely to be the single most important issue facing Company A in post-merger integration?

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. 

A company plans to raise $12 million to finance an expansion project using a rights issue.

Relevant data:

• Shares will be offered at a 20% discount to the present market price of $15.00 per share.

• There are currently 2 million shares in issue.

• The project is forecast to yield a positive NPV of $6 million.

What is the yield-adjusted Theoretical Ex-Rights Price following the announcement of the rights issue?

XCV can borrow at either 9.5% fixed or the risk-free rate plus 1.3%.

XCV wishes to borrow at a variable rate and thinks that a swap may enable it to do so cheaply

BNM can borrow the same principal sum as XCV It can borrow at 10 5% fixed or the risk-free rate plus 2 1 % BNM wishes to raise fixed rate debt

XCV and BNM have agreed to use an interest rate swap They will share any savings equally

Calculate the effective swap rate that will be paid by XCV.

Give your answer to one decimal place.

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:

If a company's bonds are currently yielding 8% in the marketplace, why would the entity's cost of debt be lower than this?

Company A has made an offer to take over all the shares in Company B on the following terms:

   • For every 20 shares currently held, Company B's shareholders will receive $100 bond with a coupon rate of 3%

   • The bond will be repaid in 10 years' time at its par value of $100.

   • The current yield on 10 year bonds of similar risk is 6%.

What is the effective offer price per share being made to Company B's shareholders?

BBA is a wholly owned subsidiary of AAB BBA operates in country B where the currency is the B$.

The following is an extract from BBA's financial statements at 31 December 20X1:

The following Information is relevant:

" The bonds were trading at $110 per $100 on 31 December 20X1. "Operating profit of BBA for the year ended 31 December 20X1 was S15 million

• The P/E ratio is 8

* Corporate income tax rate is 20%.

The tax authorities m country B Implemented thin capitalisation rules based on the level of gearing of the subsidiary, calculated as book value o( debt lo book value of equity The cut-off point for gearing used by the tax authorities for a company to be thinly capitalised is 75%.

Which of the following statements is correct as at 31 December 20X1?

A geared and profitable company is evaluating the best method of financing the purchase of new machinery. It is considering either buying the machinery outright, financed by a secured bank borrowingand selling the machinery at the end of a fixed period of time or obtain the machinery under a lease for the same period of time.

Which is the correct discount rate to use when discounting the incremental cash flows of the lease against those of the buy and borrow alternative?

A consultancy company is dependent for profits and growth on the high value individuals it employs.

The company has relatively few tangible assets.

Select the most appropriate reason for the net asset valuation method being considered unsuitable for such a company.