CIMA F3 Exam Dumps

Financial Strategy

CIMA F3 Sample Questions

Question # 1

A company has some 7% coupon bonds in issue and wishes to change its interest rateprofile.It has decided to do this by entering into a plain coupon interest rate swap with it's bank.The bank has quoted a swap rate of: 6.0% - 6.5% fixed against LIBOR.What will the company's new interest rate profile be? 

A. VARIABLE at LIBOR
B. VARIABLE at LIBOR + 0.5%
C. VARIABLE at LIBOR + 1.0%
D. FIXED at 6.5% 

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Question # 2

Company Z has just completed the all-cash acquisition of Company A.Both companies operate in the advertising industry.The market considered the acquisition a positive strategic move by Company Z.Which THREE of the following will the shareholders of Company Z expect the company'sdirectors to prioritise following the acquisition?

A. The realisation of anticipated post-acquisition synergies.
B. The development of a dividend policy to meet the expectations of the target companyshareholders.
C. The integration and retention of key employees.
D. The regulatory approval required to complete the acquisition.
E. The retention of key customers of the acquired company.

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Question # 3

A company's dividend policy is to pay out 50% of its earnings. Its most recent earnings per share was $0.50, and it has just paid a dividend per share of $0.25. Currently, dividends are forecast to grow at 2% each year in perpetuity and the cost of equity is 10.5%. In order to grow its earnings and dividends, the company is considering undertaking a new investment funded entirely by debt finance. If the investment is undertaken: • Its cost of equity will immediately increase to 12% due to the increased finance risk. • Its earnings and dividends will immediately commence growing at 4% each year in perpetuity. Which of the following is the expected percentage change in the share price if the new investment is undertaken?

A. Increase = 8.3%
B. Increase = 2%
C. Increase = 10.5%
D. Decrease = 7.7% 

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Question # 4

A company based in Country D, whose currency is the D$, has an objective of maintainingan operating profit margin of at least 10% each year.Relevant data: • The company makes sales to Country E whose currency is the E$. It also makes salesto Country F whose currency is the F$. • All purchases are from Country G whose currency is the G$. • The settlement of all transactions is in the currency of the customer or supplier.Which of the following changes would be most likely to help the company achieve itsobjective?

A. The D$ strengthens against the E$ over time.
B. The F$ weakens against the D$ over time.
C. The D$ strengthens against the G$ over time.
D. The D$ weakens against the G$ over time. 

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Question # 5

WX, an advertising agency, has just completed the all-cash acquisition of a competitor, YZ. This was seen by the market as a positive strategic move byWX.Which THREE of the following will WX's shareholders expect the company's directors toprioritise following the acquisition?

A. The integration and retention of key employees of YZ.
B. The development of a dividend policy to meet the expectations of the YZ's shareholders.
C. The regulatory approval required to complete the acquisition.
D. The retention of YZ's key customers.
E. The realisation of anticipated post-acquisition synergies. 

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Question # 6

On 1 January 20X1, a company had:• Cost of equity of 10 0%.• Cost of debt of 5.0%• Debt of $100Mmilion• 100 million $1 shares trading at $4.00 each.On 1 February 20X1:• The company's share police fell to $3.00.• Debt and the cost of debt remained unchangedThe company does not pay tax.Under Modigliani and Miller's theory without lax. what is the best estimate of the movementin the cost of equity as a result of the fall in ne share price?

A. It will stay the same at 10.0%.
B. It will rise to 10.3%.
C. It will fall to 9.3%.
D. It will rise to 11.2%

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Question # 7

BBA is a wholly owned subsidiary of AAB BBA operates in country B where the currency isthe 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 ofBBA 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 ofgearing of the subsidiary, calculated as book value o( debt lo book value of equity The cutoff 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. Gearing Is 71.43%. thin capitalisation rules are not breached
B. Gearing is 250%. thin capitalisation rules are breached
C. Gearing is 83.33%. thin capitalisation rules are breached
D. Gearing is 83.33%. thin capitalisation rules are not breached 

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Question # 8

Country X's short-term interest rates are slightly higher than its long-term rates. WhichTHREE of the following statements are correct?

A. This difference may reverse.
B. Country X's currency is expected to strengthen in the long-term.
C. Interest rates will definitely fall.
D. Interest rates are expected to fall.
E. A long-term borrower would save by taking out a short-term loan and then refinancing

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Question # 9

A new company was set up two years ago using the personal financial resources of thefounders.These funds were used to acquire suitable premises.The company has entered into a long-term lease on the premises which are not yet fullyfitted out.The founders are considering requesting loan finance from the company's bank to fund thepurchase of custom-made advanced technology equipment.No other companies are using this type of equipment.The company expects to continue to be profitable for the forseeable future.It re-invests some of its surplus cash in on-going essential research and development.Which THREE of the following features are likely to be considered negatives by the bankwhen assessing the company's credit-worthiness?

A. The equipment is advanced technology custom-made equipment.
B. The company will continue to remain profitable and to generate net cash.
C. The company premises are on a long-term lease but are not yet fully fitted out.
D. The founders invested their personal financial resources in the company. 
E. Essential on-going research and development expenditure is required.  

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Question # 10

A listed company follows a policy of paying a constant dividend. The following informationis available: • Issued share capital (nominal value $0.50) $60 million • Current market capitalisation $480 millionThe shareholders are requesting an increased dividend this year as earnings have beengrowing. However, the directors wish to retain as much cash as possible to fund newinvestments. They therefore plan to announce a 1-for-10 scrip dividend to replace the usualcash dividend.Assuming no other influence on share price, what is the expected share price followingthe scrip dividend?Give your answer to 2 decimal places. $ ?  

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Question # 11

Which of the following best explains why the interest rate parity model is highly effective inpractice?

A. Governments actively manage their exchange rates so that parity holds
B. Divergence from parity is impossible because exchange rates drive interest rates
C. Any divergence from parity can be observed by the market and corrected by arbitrage
D. Speculative forces drive the interest rates and exchange rates together to achieveparity. 

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Question # 12

Integrated reporting is designed to make visible the capitals on which the organisationdepends, and how the organisation uses those capitals to create value in the short,medium and long termWhich THREE of the following capitals are specifically identified in the Integrated Reporting Framework?

A. Manufactured
B. Research and Development
C. Community
D. Human
E. Financial 

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Question # 13

STU has relatively few tangible assets and is dependent for profits and growth on the highvalue individuals it employs. Which of the following statements best explains why the net asset valuator method’s considered unstable for TU?

A. STU does not account for its tangible assets 
B. STU does not account for its intangible assets.
C. STU accounts for its intangible assets at net realisable value.
D. STU accounts for its intangible assets at historical value.

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Question # 14

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

A. stay the same.
B. decrease.
C. increase.
D. increase or decrease depending on the bond's coupon rate. 

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Question # 15

Company M plans to bid for Company J. Company M has 20 million shares in issue and acurrent share price of $10.00 before publicly announcing the planned takeover. Company Jhas 10 million shares in issue and a current share price of $4.00.The directors of Company M are considering an all-share bid of 1 Company M shares for 2Company J shares.Synergies worth $20m are expected from the acquisition.What is the likely change in wealth for Company M's shareholders (in total) if the bid isaccepted?Give your answer to the nearest $ million.$ ? million  

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Question # 16

Which THREE of the following remain unchanged over the life of a 10 year fixed rate bond? 

A. The coupon rate
B. The yield
C. The market value
D. The nominal value
E. The amount payable on maturity

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Question # 17

JAG and ZEB are two listed companies. JAG is approximately 20 times the size of ZEB.10 days ago JAG made a hostile bid for ZEB. offering a share exchange.The bid price represents a 10% profit to the shareholders of ZEB at today's market pricesto reflect the high levels of synergistic benefits that JAG expects to realise from thetransaction.Which of the following is the greatest future threat to the post-transaction value for JAG?

A. Forecast synergistic benefits are not realised.
B. New shareholders acquired from ZEB demand a higher dividend payout than JAG isused to.
C. Negative market response to the bid.
D. New shareholders acquired from ZEB withdraw their investment by selling their shareswithin 12 months. 

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Question # 18

A large multi-divisional company in the food processing and distribution business isconducting a strategic review. The divisions all compete in the same market.The sale of one of its underperforming food processing divisions to the divisionalmanagement team is currently being considered. The purchase by the divisionalmanagement team will require venture capital finance.Which THREE of the following are likely to influence the multi-divisional company'sdecision on whether or not to sell the under-performing division to the management team?

A. The divisional management team has detailed confidential information about theoperation of the other divisions.
B. The divisional management team has skills and experience that are important for thefuture successful operation of other divisions.
C. The ability of the management team to raise the finance required to complete thepurchase of the division at a reasonable price.
D. The quality of the management team and its ability to manage the divested divisionsuccessfully.
E. The specific conditions imposed on the management team by the venture capitalprovider. 

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Question # 19

Company WWW is considering making a takeover bid for Company KKA Company KKA's current share price is $5.00 Company WWW is considering either " A cash payment of $5.75 for each share in Company KKA " A 5 year corporate bond with a market value of $90 in exchange for 15 shares in Company KKA Calculate the highest percentage premium which Company KKA shareholders will receive.

A. Corporate bond premium = 80% 
B. Corporate bond premium = 20%
C. Cash premium = 10%
D. Cash premium = 15%

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Question # 20

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. The theoretical ex-rights price will be higher under Director B's proposal than under Director A's proposal.
B. More shares will be issued under Director B's proposal than under Director A's proposal.
C. The rights issue price will be $3.00 under Director A's proposal.
D. The terms of the rights issue will be one new share for every two existing shares under Director A's proposal. 
E. Shareholder wealth will be higher under Director A's proposal than under Director B's proposal. 

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Question # 21

A large, listed company in the food and household goods industry needs to raise $50million for a period of up to 6 months.It has an excellent credit rating and there is almost no risk of the company defaulting on theborrowings. The company already has a commercial paper programme in place and has agood relationship with its bank.Which of the following is likely to be the most cost effective method of borrowing themoney?

A. Bank overdraft
B. 6 month term loan
C. Treasury Bills
D. Commercial paper

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Question # 22

A company is planning to repurchase some of its shares. Relevant details are as follows: • 100 million shares in issueQuestion No : 370Question No : 371 FILL IN THE BLANKCIMA F3 : Practice Test231 • Current share price $5 • 5 million shares to be repurchased • 10% repurchase premium • Repurchased shares to be cancelledWhat would you expect the share price after the repurchase to be?Give your answer to two decimal places.$ ?

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Question # 23

A venture capitalist is considering investing in a management buy-out that would befinanced as follows:• Equity from managers• Equity from a venture capitalist• Mezzanine debt finance from a venture capitalist• Senior debt from a bankThe venture capitalist is planning to work with the management to grow the business inanticipation of an initial public offering within five years.However, the cash forecast shows a potential shortage of funds in the first year and theventure capitalist is evaluating the potential impact of cash being generated in the first yearbeing significantly lower than forecast.The most important risk that a shortage of cash would create for the management buyout isthat the new company has insufficient funds to:

A. pay interest on bank debt finance.
B. pay contractual director bonuses.
C. pay dividends to venture capitalist.
D. invest in new capital projects required to generate growth.

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Question # 24

A company has accumulated a significant amount of excess cash which is not required forinvestment for the foreseeable future.It is currently on deposit, earning negligible returns.The Board of Directors is considering returning this excess cash to shareholders using ashare repurchase programme.The majority of shareholders are individuals with small shareholdings.Which THREE of the following are advantages of the company undertaking a sharerepurchase programme? 

A. Individual shareholders can realise their investment if they wish.
B. The earnings per share should increase for the shareholders who do not sell their shares.
C. It reduces excess cash which might have been attractive to predators.
D. It reduces the amount of cash for potential future investment opportunities.
E. Institutional investors generally prefer a constant predictable income in the form ofdividends.

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Question # 25

A company enters into a floating rate borrowing with interest due every 12 months over thefive year life of the borrowing.At the same time, the company arranges an interest rate swap to swap the interest profileon the borrowing from floating to fixed rate.These transactions are designated as a hedge for hedge accounting purposes under IAS39 Financial Instruments: Recognition and Measurement.Assuming the hedge is considered to be effective, how would the swap be accountedfor 12 months later? 

A. The swap would be shown at nominal value in the statement of financial position and thechange in value posted to other comprehensive income.
B. The swap would be shown at nominal value in the statement of financial position and thechange in value posted to profit or loss.
C. The swap would be shown at fair value the statement of financial position and thechange in value posted to other comprehensive income.
D. The swap would be shown at fair value the statement of financial position and thechange in value posted to profit or loss.

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Question # 26

ADC is planning to acquire DEF in order to benefit from the expertise of DEF's owner‘managers Both are Listed companies. ADC is trying to decide whether to offer cash orshares in consideration for DEF's shares.Which THREE of the following are advantages to ABC of offering shares to acquire CEF?

A. It shares tie benefits of future growth with the DCT shareholder.
B. It dilutes ownership in ABC.
C. It incentivises DEF to continue creating value for the combined group
D. It results in a tax saving for ABC.
E. The risk of poor future performance of the acquisition is shared with the DEF companyshareholder.
F. It preserves liquidity 

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Question # 27

A listed company with a growing share price plans to finance a fouryear research project with debt. The main criterion for the finance is to minimise the annual cashflow payments on the debt. The research will be sold at the end of the project. Which of the following would be the most suitable financing method for the company? 

A. Bonds with warrants
B. Finance lease
C. Standard bonds
D. Bank loan 

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Question # 28

An all equity financed company reported earnings for the year ending 31 December 20X1 of $8 million. One of its financial objectives is to increase earnings by 5% each year. In the year ending 31 December 20X2 it financed a project by issuing a bond with a $1 million nominal value and a coupon rate of 4%. The company pays corporate income tax at 20%. If the company is to achieve its earnings target for the year ending 31 December 20X2, what is the minimum operating profit (profit before interest and tax) that it must achieve?

A. $6.69 million 
B. $10.50 million 
C. $8.40 million 
D. $10.54 million

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