Free CIMA F3 Practice Exam with Questions & Answers | Set: 9

The value of a call option will increase because of:

Listed Company A has prepared a valuation of an unlisted company. Company B. to achieve vertical integration Company A is intending to acquire a controlling interest in the equity of Company B and therefore wants to value only the equity of Company B.

The assistant accountant of Company A has prepared the following valuation of Company B's equity using the dividend valuation model (DVM):

Where:

• S2 million is Company B's most recent dividend

• 5% is Company B's average dividend growth rate over the last 5 years

• 10% is a cost of equity calculated using the capital asset pricing model (CAPM), based on the industry average beta factor

Which THREE of the following are valid criticisms of the valuation of Company B's equity prepared by the assistant accountant?

Formed in 2010, the International Integrated Reporting Council

The primary purpose of the IIRC's framework is to help enable an organisation to communicate which of the following'?

A company proposes to value itself based on the net present value of estimated future cash flows.

Relevant data:

   • The cash flow for the next three years is expected to be £100 million each year

   • The cash flow after year 3 will grow at 2% to perpetuity

   • The cost of capital is 12%

The value of the company to the nearest $ million is:

A company has a covenant on its 5% long-term bond, stipulating that its retained earnings must not fall below $2 million.

The company has 100 million shares in issue.

Its most recent dividend was $0.045 per share. It has committed to grow the dividend per share by 4% each year.

The nominal value of the bond is $60 million. It is currently trading at 80% of its nominal value.

Next year's earnings before interest and taxation are projected to be $11.25 million.

The rate of corporate tax is 20%.

If the company increases the dividend by 4%, advise the Board of Directors if the level of retained earnings will comply with the covenant?

Two companies that operate in the same industry have different Price/Earnings (P/E) ratios as follows:

Which of the following is the most likely explanation of the different P/E ratios?

A company is financed by debt and equity and pays corporate income tax at 20%.  

Its main objective is the maximisation of shareholder wealth.

It needs to raise $200 million to undertake a project with a positive NPV of $10 million.

The company is considering three options:

   • A rights issue.

   • A bond issue.

   • A combination of both at the current debt to equity ratio.

Estimations of the market values of debt and equity both before and after the adoption of the project have been calculated, based upon Modigliani and Miller's capital theory with tax, and are shown below:

Under Modigliani and Miller's capital theory with tax, what is the increase in shareholder wealth?

A large multi-divisional company in the food processing and distribution business is conducting a strategic review.  The divisions all compete in the same market.

The sale of one of its underperforming food processing divisions to the divisional management team is currently being considered. The purchase by the divisional management team will require venture capital finance.

Which THREE of the following are likely to influence the multi-divisional company's decision on whether or not to sell the under-performing division to the management team?

A venture capitalist invests in a company by means of buying

* 6 million shares for $3 a share and

• 7% bonds with a nominal value of $2 million, repayable at par in 3 years' time

The venture capitalist expects a return on the equity portion of the investment of at least 20% a year on a compound basis over the first 3 years of the investment

The company has 8 million shares in issue

What is the minimum total equity value for the company in 3 years' time required to satisfy the venture capitalist's expected return?

Give your answer to the nearest $ million

Extracts from a company's profit forecast for the next financial year is as follows:

Since preparing the forecast, the company has decided to return surplus cash to shareholders by a share repurchase arrangement.

The share repurchase would result in the company purchasing 20% of the 2,000 million ordinary shares currently in issue and cancelling them.

Assuming the share repurchase went ahead, the impact on the company's forecast earnings per share will be an increase of: