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CIMA CIMAPRA19-F03-1: F3 Financial Strategy is an essential exam for individuals who want to pursue a career in finance. F3 exam is designed to test the candidate's understanding of financial strategy and how it can be utilized to maximize shareholder value. F3 exam is conducted by the Chartered Institute of Management Accountants (CIMA), which is a globally recognized organization that provides professional qualifications in the field of finance.
NEW QUESTION # 144
A company has in a 5% corporate bond in issue on which there are two loan covenants.
* Interest cover must not fall below 3 times
* Retained earnings for the year must not fall below $3.5 million
The Company has 200 million shares in issue.
The most recent dividend per share was $0.04.
The Company intends increasing dividends by 10% next year.
Financial projections for next year are as follows:
Advise the Board of Directors which of the following will be the status of compliance with the loan covenants next year?
- A. The company will breach the covenant in respect of retained earnings only.
- B. The company will be in breach of the covenant in respect of interest cover only.
- C. The company will be in compliance with both covenants.
- D. The company will be in breach of both covenants.
Answer: A
Explanation:
Interest cover = PBIT / Interest = 20 / 5 = 4 times # 3 # covenant met.
Next year dividend per share = 0.04 × 1.10 = 0.044.
Total dividend = 0.044 × 200m = 8.8m.
Retained earnings = Earnings - Dividends = 12 - 8.8 = 3.2m < 3.5m # retained-earnings covenant breached only.
NEW QUESTION # 145
A venture capitalist is most likely to take which THREE of the following exit routes?
- A. Selling back to the original owners.
- B. Flotation via a stock market listing.
- C. Trade sale to another company.
- D. Raising long-term debt from the company.
- E. Liquidation of the company.
Answer: B,C,E
NEW QUESTION # 146
A company financed by equity and debt can be valued by discounting:
- A. free cash flow before interest at WACC.
- B. free cash flow after interest at WACC.
- C. free cash flow before interest at the cost of equity.
- D. free cash flow after interest at the cost of equity.
Answer: A
NEW QUESTION # 147
A listed company in the retail sector has accumulated excess cash.
In recent years, it has experienced uncertainly with forecasting the required level of cash for capital expenditure due to unpredictable economic cycles.
Its excess cash is on deposit earning negligible returns.
The Board of Directors is considering the company's dividend policy, and the need to retain cash in the company.
Which THREE of the following are advantages of retaining excess cash in the company?
- A. The company will be in a position to respond promptly to unexpected investment opportunities.
- B. The excess cash is earning a negligible return.
- C. The market may interpret the return of excess cash as a sign of weak growth prospects.
- D. Retaining excess cash may make the company vulnerable to hostile takeover.
- E. Liquidity problems are less likely to be experienced if there is a downturn in business.
Answer: A,C,E
Explanation:
C - More cash = able to react quickly to unexpected investment opportunities.
D - Cash buffer reduces the likelihood of liquidity problems in a downturn.
E - If excess cash were returned, markets might read it as "no good growth opportunities", so retaining avoids that negative signal.
NEW QUESTION # 148
A company is financed as follows:
* 400 million $1 shares quoted at $3.00 each.
* $800 million 5% bonds quoted at par.
The company plans to raise $200 million long term debt to finance a project with a net present value of $100 million.
The bank that is providing the debt is insisting on a maximum gearing level covenant.
Gearing will be based on market values and calculated as debt/(debt + equity).
What is the lowest figure for the gearing covenant that the bank could impose without the company breaching the agreement?
- A. 45%
- B. 43%
- C. 46%
- D. 44%
Answer: D
NEW QUESTION # 149
A company plans to raise S15 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 S12 50 per share
* There are currently 3 million shares in issue
* The project is forecast to yield a positive NPV of $9 million
What is the yield-adjusted Theoretical Ex-Rights Price following the announcement of the rights issue?
- A. $11.67
- B. $13.67
- C. $11 25
- D. $9.50
Answer: A
NEW QUESTION # 150
A company is planning a share repurchase programme with the following details:
* Repurchased shares will be immediately cancelled.
* The shares will be purchased at a premium to the market share price.
The current market share price is greater than the nominal value of the shares.
Which of the following statements about the impact of the share repurchase programme on the company's financial statements is correct?
- A. The premium to the nominal value would be charged to retained earnings.
- B. The share capital figure would reduce by the nominal value of the shares purchased.
- C. The total value of the equity in its Statement of Financial Position would remain unchanged.
- D. The premium to the market value would be charged to the Income Statement.
Answer: B
Explanation:
The company is repurchasing and cancelling its own shares.
When shares are cancelled:
Share capital is reduced by the nominal value of the shares bought back. # Any amount paid above nominal value reduces equity reserves (such as share premium and/or retained earnings), but it does not go through the Income Statement.
Total equity does decrease by the full repurchase amount (so option C is wrong).
No element of the repurchase (including any "premium to market value") is treated as an expense in the Income Statement under IFRS - it's purely an equity transaction (so D is wrong).
Option A is too specific and not strictly correct, because the premium over nominal is not necessarily all charged only to retained earnings - it can also be charged to share premium / other reserves.
So the one fully correct statement is:
B). The share capital figure would reduce by the nominal value of the shares purchased.
NEW QUESTION # 151
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?
- A. Higher price due to synergistic benefits.
- B. Improved relationships with management buyout team in the event of a sale to the private equity purchaser.
- C. Better co-operation post divestment.
- D. Enhanced big data opportunities.
Answer: C
NEW QUESTION # 152
Select whether the following statements are true or false with regard to Modigliani and Miller's dividend policy theory.
Answer:
Explanation:
NEW QUESTION # 153
The directors of the following four entities have been discussing dividend policy:
Which of these four entities is most likely to have a residual dividend policy?
- A. C
- B. A
- C. B
- D. D
Answer: A
Explanation:
A residual dividend policy pays dividends only after all positive-NPV projects are funded - typical for firms whose investors want growth rather than income.
C is a small listed company whose investors seek maximum capital growth # classic residual policy case.
NEW QUESTION # 154
Which of the following statements about companies seeking a stock market listing is correct?
- A. When a company seeks a listing this may unsettle its staff, potentially resulting in a loss of valued employees.
- B. A listing will require the owners to either sell a majority of their shares, or, if they retain their shares, to step down from the board.
- C. A listing may make it harder for a company to raise money from its existing lenders.
- D. The enhanced reputation of the company can improve its credit rating reducing the risk of non-payment to suppliers and lenders.
Answer: D
Explanation:
A listing usually improves access to finance; it doesn't make it harder to borrow.
A stock exchange listing can enhance reputation, transparency and access to capital, which can improve the company's credit rating, lowering the perceived risk to suppliers and lenders # B is correct.
C may sometimes happen but isn't a standard, expected consequence in the way B is.
D is wrong - owners do not have to sell a majority or leave the board when listing.
NEW QUESTION # 155
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 3Q°/o 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?
- A. $155.14 million
- B. $111 39 million
- C. $146 39 million
- D. $120 14 million
Answer: A
Explanation:
Equity: $30m
Debt: $35m at 5% interest, redeemable in 5 years
They require 30% p.a. compound on the equity and no dividends are paid.
Equity value required in 5 years
Future value=30×1.35=30×3.71293#$111.39m\text{Future value} = 30 \times 1.3^5 = 30 \times 3.71293\approx \$111.39\text{m}Future value=30×1.35=30×3.71293#$111.39m
Debt cash flows
Annual interest: 35×5%=$1.75m35 \times 5\% = \$1.75\text{m}35×5%=$1.75m # over 5 years: 1.75×5=$8.75 m1.75 \times 5 = \$8.75\text{m}1.75×5=$8.75m Principal repaid in year 5: $35m Total due to venture capitalists
111.39+8.75+35=$155.14m (approx)111.39 + 8.75 + 35 = \$155.14\text{m (approx)}111.39+8.75+35=$155.14m (approx)
NEW QUESTION # 156
A company is planning to issue a 5 year $100 million bond at a fixed rate of 6%.
It is also considering whether or not to enter into a 10 year $100 million swap to receive 5% fixed and pay Libor + 1% once a year.
The company predicts that Libor will be 4% over the life of the 5 years.
What is the impact of the swap on the company's annual interest cost assuming that the Libor prediction is correct?
- A. Increase by 1%.
- B. Fall by 2%.
- C. Remain the same.
- D. Fall by 1%.
Answer: C
NEW QUESTION # 157
A company has:
* $6 million market value of equity
* $4 million market value of debt
* WACC of 11.04%
* Corporate income tax rate of 20%
According to Modigliani and Miller's theory of capital structure with tax, what is the ungeared cost of equity?
- A. 12.00%
- B. 10.16%
- C. 16.24%
- D. 12.54%
Answer: A
NEW QUESTION # 158
A company based in the USA has a substantial fixed rate borrowing at an interest rate of 3.5% and wishes to swap a part of this to a floating rate to take advantage of reducing interest rates Its bank has quoted swap rates of 3 4%-3 5% against 12-month USD risk-free rate.
What is the overall interest rate achieved by the company under this borrowing plus swap combination?
- A. 12-month USD risk-free rate minus 0 1 % (where 0 1 % = the fixed rate of 3.6% minus the swap rate of
3 4%) - B. 12-month USD risk-free rate
- C. 12-month USD risk-free rate plus 0 1% (where 0.1 % = the fixed rate of 3.5% minus the swap rate of 3
4%) D. Unchanged at 3.60% as this is the same as the swap rate
Answer: C
Explanation:
Company pays 3.5% fixed on its borrowing and enters a swap at 3.4-3.5% vs 12-month USD risk-free rate.
To move from fixed to floating, it will receive fixed 3.4% and pay floating (risk-free):
Net interest:
3.5%#3.4%+rf=rf+0.1%3.5\% - 3.4\% + \text{rf} = \text{rf} + 0.1\%3.5%#3.4%+rf=rf+0.1% Answer to Q102: C - 12-month USD risk-free rate plus 0.1%
NEW QUESTION # 159
PYP is a listed courier company. It is looking to raise new finance to fit each of its delivery vans with new equipment to allow improved parcel tracking for customers The senior management team of PYP have decided on a 10-year secured bond to finance this investment- Which TWO of the following variables are most likely to decrease the yield to maturity of the bond?
- A. The announcement of a new contract for PYP that will increase operating profits by 5°/o over the next 5 years.
- B. Changing the term of the bond from 1 0 years to 5 years to match the expected life of the new equipment
- C. The senior management team decide to issue a convertible bond rather than a conventional bond
- D. The senior management team decide to issue an unsecured bond rather than a secured bond
Answer: B,C
NEW QUESTION # 160
The following information relates to Company A's current capital structure:
Company A is considering a change in the capital structure that will increase gearing to 30:70 (Debt:Equity).
The risk -free rate is 3% and the return on the market portfolio is expected to be 10%.
The rate of corporate tax is 25%
Using the Capital Asset Pricing Model, calculate the cost of equity resulting from the proposed change to the capital structure.
- A. 12.3%
- B. 10.1%
- C. 11.4%
- D. 9.3%
Answer: A
NEW QUESTION # 161
D has US$10 million to invest over 12 months in either USS or GBP Its options are to invest in USS at the present USS interest rate of 10 18%. or to convert the USS to GBP at the spot rate GBP1 =US$1 61 and invest in GBP at an interest rate of 6.4%.
According to the interest rate parity theory, what will the one year forward rate be?
Give your answer to three decimal places.
- A. 1.668
- B. 1.667
Answer: B
NEW QUESTION # 162
Which of the following statements best describes a residual dividend policy?
- A. Dividends are paid at a constant rate.
- B. Dividends are paid only if no further positive NPV projects are available.
- C. Dividends are paid only after the on-going operational needs of the business have been met.
- D. All surplus earnings are invested back into the business.
Answer: B
Explanation:
This is exactly what statement B describes: "Dividends are paid only if no further positive NPV projects are available." Under this policy, if the firm has many profitable projects, dividends may be low or even zero; if investment opportunities are scarce, dividends may be higher because more earnings are surplus.
Statement A is too vague: all companies must cover operational needs before paying dividends, so that does not uniquely describe a residual policy.
Statement C describes an extreme retention policy where all earnings are reinvested, which is not the same as residual dividends (where some surplus can be paid out).
Statement D refers to a stable dividend policy, where a constant or smoothly growing dividend per share is targeted, regardless of short-term earnings volatility.
Therefore, the best description of a residual dividend policy in F3 terms is B.
NEW QUESTION # 163
Company A is a large listed company, with a wide range of both institutional and private shareholders.
It is planning a takeover offer for Company B.
Company A has relatively low cash reserves and its gearing ratio of 40% is higher than most similar companies in its industry.
Which TWO of the following would be the most feasible ways of Company A structuring an offer for Company B?
- A. Share for share exchange.
- B. Debt for share exchange.
- C. Cash offer, funded by a rights issue.
- D. Cash offer, funded by borrowings.
- E. Cash offer, funded from existing cash resources.
Answer: A,C
NEW QUESTION # 164
Modigliani and Miller are the main proponents of the view that the dividend policy is irrelevant to the value of a company's shares.
They argue that a company that continually reinvests its entire earnings would generate the same shareholder wealth if it engaged in a policy of high dividends and financed its expansion with funds obtained from rights issues.
Which THREE of the following statements are assumptions that are required in order to support this proposition?
- A. There are no transaction costs involved in the issue of new shares (including rights issues).
- B. The capital markets are efficient markets.
- C. There is a multiplicity of corporate and personal income tax rates.
- D. Investors act in a rational manner.
- E. Investors do not always have access to perfect information.
Answer: A,B,D
Explanation:
In CIMA F3, Modigliani and Miller's (MM) Dividend Irrelevance Theory is a core examinable concept under financial policy decisions. MM argue that dividend policy does not affect shareholder wealth, provided certain highly restrictive assumptions hold true. Under this theory, shareholders are indifferent between dividends and capital gains because they can create their own "homemade dividends" by selling shares if required.
To support this proposition, the following assumptions must apply:
A). There are no transaction costs involved in the issue of new shares (including rights issues)
# Correct
CIMA F3 states that MM assume no flotation or transaction costs. If issuing new equity were costly, companies paying high dividends would incur extra costs when raising funds, which would affect shareholder wealth and invalidate dividend irrelevance.
C). Investors act in a rational manner
# Correct
The theory assumes investors are rational and base decisions solely on wealth maximisation, not preferences for income versus capital gains. This assumption is explicitly stated in CIMA learning materials.
D). The capital markets are efficient markets
# Correct
An efficient market ensures that share prices reflect all available information. CIMA F3 emphasises that efficiency is essential so that financing and dividend decisions do not distort share prices.
Why the other options are incorrect
B). There is a multiplicity of corporate and personal income tax rates
# Incorrect
MM's original theory assumes no taxation, not multiple tax rates. Taxes would make dividends and capital gains unequal.
E). Investors do not always have access to perfect information
# Incorrect
MM assume perfect information. Any information asymmetry would affect pricing and invalidate dividend irrelevance.
Discursive_F0
NEW QUESTION # 165
CI IJ has decided to move its production plant to overseas country X.
This would make the product cheaper to produce. The technology used to make the product is very advanced and some of the skilled staff would have to move to country X.
The Production Director has identified that there are some political risks in moving to county X.
For each of the political risks of moving to country X shown below, select the correct method for reducing the risk.
Answer:
Explanation:
NEW QUESTION # 166
The Board of Directors of a listed company wish to estimate a reasonable valuation of the entire share capital of the company in the event of a takeover bid.
The company's current profit before taxation is $10 0 million.
The rate of corporate tax is 20%.
The average P/E multiple of listed companies in the same industry is 10 times current earnings.
The P/E multiple of recent takeovers in the same industry have ranged from 11 times to 12 times current earnings.
The average P/E multiple of the top 100 companies on the stock market is 16 times current earnings.
Advise the Board of Directors which of the following is a reasonable estimate of a range of values of the entire share capital in the event of a bid being made for the whole company?
- A. Minimum = S80 million, and maximum = $128 million.
- B. Minimum = $88 million, and maximum = $96 million.
- C. Minimum = $110 million, and maximum = $120 million.
- D. Minimum = S100 million, and maximum = $120 million.
Answer: B
NEW QUESTION # 167
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Those who clear the F3 exam can expect to gain proficiency in financial strategy concepts and evaluate the financial impacts on organizations. Furthermore, F3 certified professionals can create a sound financial strategy, align it with business objectives, and manage financial risks. Professionals who have cleared F3 exam have better career prospects, higher salaries and can expect to work in various finance and accounting roles in global organizations. As F3 exam is challenging, it is essential to have a solid understanding of financial concepts and strategies.
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