Latest CIMAPRA19-F03-1 Study Guides 2024 - With Test Engine PDF
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NEW QUESTION # 188
The Senior Management Team of ABC, an owner-managed, capital intensive start-up engineering business, is considering the options for its dividend policy. It has so far been a successful business and is expanding quickly Once in place, the Senior Management Team anticipates that its current investment plans will yield returns for many years to come The first agenda item at every meeting currently concerns arranging and funding new equipment and premises.
Which of the following dividend policies is likely to be the most suitable?
- A. A constant pay-out ratio
- B. Constant growth
- C. Zero dividend
- D. Residual policy.
Answer: D
NEW QUESTION # 189
Company Z wishes to borrow $50 million for 10 years at a fixed rate of interest.
Two alternative approaches are being considered: A. Issue a 10 year bond at a fixed rate of 6%, or B. Borrow from the bank at Libor +2.5% for a 10 year period and simultaneously enter into a 10 year interest rate swap.
Current 10 year swap rates against Libor are 4.0% - 4.2%.
What is the difference in the net interest cost between the two alternative approaches?
- A. Approach A is 0.7% a year less expensive
- B. Approach B is 2.2% a year less expensive
- C. Approach A is 0.5% a year less expensive
- D. Approach B is 2.0% a year less expensive
Answer: A
NEW QUESTION # 190
Company A has a cash surplus.
The discount rate used for a typical project is the company's weighted average cost of capital of 10%.
No investment projects will be available for at least 2 years.
Which of the following is currently most likely to increase shareholder wealth in respect of the surplus cash?
- A. Paying the surplus cash as a dividend at the earliest opportunity.
- B. Investing in a 2 year bond returning 5% each year.
- C. Maintaining the cash in a current account.
- D. Investing in the local money market at 4% each year.
Answer: A
Explanation:
Calc_Set4
NEW QUESTION # 191
Two listed companies in the same industry are joining together through a merger.
What are the likely outcomes that will occur after the merger has happened?
Select ALL that apply.
- A. Decrease in employee motivation due to internal changes.
- B. Increase in customer base.
- C. Competition authorities step in to stop a potential price monopoly.
- D. Changes to supplier relationships owing to internal changes.
- E. Cost savings from synergistic benefits and economies of scale.
Answer: A,B,D,E
NEW QUESTION # 192
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. 11.4%
- B. 12.3%
- C. 10.1%
- D. 9.3%
Answer: B
NEW QUESTION # 193
Company A is planning to acquire Company B by means of a cash offer. The directors of Company B are prepared to recommend acceptance if a bid price can be agreed. Estimates of the net present value (NPV) of future cash flows for the two companies and the combined group post acquisition have been prepared by Company A's accountant. There are as follows:
What is the maximum price that Company A should offer for the shares in Company B?
Give your answer to the nearest $ million
Answer:
Explanation:
150
NEW QUESTION # 194
Using the CAPM, the expected return for a company is 10%. The market return is 7% and the risk free rate is
1%.
What does the beta factor used in this calculation indicate about the risk of the company?
- A. It has greater risk than the average market risk.
- B. It is not possible to tell from CAPM.
- C. It has the same risk as the average market risk.
- D. It has lower risk than the average market risk.
Answer: A
NEW QUESTION # 195
A private company was formed five years ago and is currently owned and managed by its five founders. The founders, who each own the same number of shares have generally co-operated effectively but there have also been a number of areas where they have disagreed The company has grown significantly over this period by re-investing its earnings into new investments which have produced excellent returns The founders are now considering an Initial Public Offering by listing 70% of the shares on the local stock exchange Which THREE of the following statements about the advantages of a listing are valid?
- A. Increases dividend payouts
- B. Reduces agency conflict
- C. Provides an exit route for the founders
- D. Increases the profile and reputation of the business.
- E. Helps access to wider sources of finance.
Answer: C,D,E
NEW QUESTION # 196
A company with 4 million shares in issue wishes to raise $4 million by means of a rights issue The share price prior to the rights issue is $5.00.
Under the rights issue, 1 million new shares will be issued at $4.00.
When the rights issue is announced it is expected that the Theoretical Ex-rights Price (TERP) will be $4.80 The directors of the company are considering offering any shareholder who does not wish to take up the rights the opportunity to sell the rights back to the company for $1.00.
Which of the following is the most likely consequence of the directors offer?
- A. The directors offer will increase demand for the shares and as a consequence the share price will rise above the theoretical ex-rights price.
- B. It will result in fewer shareholders taking up the rights and as a consequence less cash will be raised from the rights issue
- C. It will encourage more shareholders to sell their lights on the open market.
- D. It will have no effect on the take up of the rights because shareholder wealth will be the same whether the rights are taken up or sold back to the company
Answer: B
NEW QUESTION # 197
Which TWO of the following statements about debt instruments are correct?
- A. Changes in corporation tax rates will have no effect on the tax shield of fixed rate debentures.
- B. A zero coupon will eliminate the tax shield effect on debt payments.
- C. If corporation tax rates rise, the tax shield effect on debenture interest will be reduced.
- D. The true cost of servicing debt instruments to the company is the post-tax cost of debt.
Answer: A,B
NEW QUESTION # 198
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?
Answer:
Explanation:
Give your answer to the nearest $ million
31
NEW QUESTION # 199
A listed company with a growing share price plans to finance a four-year 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. Finance lease
- B. Bonds with warrants
- C. Standard bonds
- D. Bank loan
Answer: B
NEW QUESTION # 200
Company M plans to bid for Company J. Company M has 20 million shares in issue and a current share price of $10.00 before publicly announcing the planned takeover. Company J has 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 2 Company 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 is accepted?
Give your answer to the nearest $ million.
$ ? million
- A. 0
- B. 1
Answer: B
NEW QUESTION # 201
An unlisted software development company has recently reported disappointing results. This was partly due to weak economic conditions but also because of its poor competitive position. The company has a number of exciting development opportunities which would enable it to achieve significant future growth. The company's growth potential has been hindered by its inability to secure sufficient new finance.
To enable the company raise new finance the Directors are considering working forwards an IPO in 10 years and accepting finance from a venture capitalist in order support in the intervening period.
The directors are keen to retain a controlling stake in the company and full representation on the board. They therefore require venture capitalists to provide funds as a mix of debt and equity and not soley equity finance.
Which THREE of the following are most likely to disrupt the directors' plans to use venture capital finance?
- A. Venture capitalists normally expect an exit strategy sconer than the planned IPO in 10 years'time.
- B. Venture capitalists always require ownership of more than 50% of the shares in a company to ensure control.
- C. The venture capital finance offered is much more expensive than expected.
- D. Venture capitalists normally expect at least one seat on the board.
- E. Venture capitalists only provide equity finance and will therefore not be interested in providing a combination of debt and equity finance.
Answer: A,C,D
NEW QUESTION # 202
Which of the following statements are true with regard to interest rate swaps?
Select ALL that apply.
- A. Risk of default is high from the floating interest rate payer if interest rates rise.
- B. When interest rates are falling the risk of default by the fixed interest rate payer is low.
- C. An interest rate swap is an external hedging technique.
- D. An nicest rate swap is an internal hedging technique.
- E. Some companies interest rate swap to deliberately increase their risks because they believe that they are better at predicting future interest rates than the market.
Answer: A,B,C
NEW QUESTION # 203
Company P is a large unlisted food-processing company.
Its current profit before interest and taxation is $4 million, which it expects to be maintainable in the future.
It has a $10 million long-term loan on which it pays interest of 10%.
Corporate tax is paid at the rate of 20%.
The following information on P/E multiples is available:
Which of the following is the best indication of the equity value of Company P?
- A. $40 million
- B. $24 million
- C. $48 million
- D. $80 million
Answer: B
NEW QUESTION # 204
Company GDD plans to acquire Company HGG, an unlisted company which has been in business for 3 years.
Company HGG has incurred losses in its first 3 years but is expected to become highly profitable in the near future There are no listed companies in the country operating in the same business field as Company HGG The future success of Company HGG's business and hence the future growth rate in earnings and dividends is difficult to determine Company GDD is assessing the validity of using the dividend growth method to value Company HGG Which THREE of the following are weaknesses of using the dividend growth model to value an unlisted company such as Company HGG?
- A. The cost of capital will be difficult to estimate
- B. The company has been unprofitable to date and hence, there is no established dividend payment pattern
- C. The future growth rate in earnings and dividends will be difficult to accurately determine
- D. The dividend growth model does not take the time value of money into consideration
- E. The future projected dividend stream is used as the basis for the valuation
Answer: A,B,E
NEW QUESTION # 205
A company's annual dividend has grown steadily at an annual rate of 3% for many years. It has a cost of equity of 11%. The share price is presently $64.38.
The company is about to announce its latest dividend, which is expected to be $5.00 per share.
The Board of Directors is considering an attractive investment opportunity that would have to be funded by reducing the dividend to $4.50 per share. The board expects the project to enable future dividends to grow by 5% every year and the cost of equity to remain unchanged.
Calculate the change in share price, assuming that the directors announce their intention to proceed with this investment opportunity.
Give your answer to 2 decimal places.
$ ?
Answer:
Explanation:
14.37
NEW QUESTION # 206
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 39% 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. $120 14 million
- B. $155.14 million
- C. $146 39 million
- D. $111 39 million
Answer: D
NEW QUESTION # 207
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