Free F3 Financial Strategy Exam CIMAPRA19-F03-1 Exam Practice Test

Company M's currentprofit before interest and taxationis$5.0 million.It has a long-term 10% corporate bond in issue with a nominal value of $10 million.The rate of corporate tax is 25%.It plans to continue to pay out 50% of its earnings in dividends and earnings are expected to grow by 3% each year in perpetuity.Its cost of equity is 10%.Using the dividendgrowthmodel, advise the Board of Directors of Company M which of the following provide areasonable valuation of Company M's equity?

• $73.6 million
• $22.1 million
• $44.1 million
• $50.1 million

The Board of Directors of a listed company have decided that it needs to increase its equity capital to ensure it is in a more stable financial position.The shareholder profile is a mix of institutional and individual small shareholders.The board is considering either:* A scrip dividend* A zero dividendWhich THREE of the following would be considereddisadvantagesof a scrip dividend compared to a zero dividend?

• A scrip dividend results in distributable reserves being moved to non-distributable reserves.
• A scrip dividend will dilute the control of current shareholders.
• A scrip dividend results in more shares in issue which will create an expectation for future dividends.
• There will be company secretarial and additional administration involved with a scrip dividend.
• A scrip issue may give shareholders the impression that they are receiving something of value.

A company is owned by its five directors who want to sell the business.Current profit after tax is $750,000.The directors are currentlypaid minimal salaries, taking most of their incomes as dividends.After the company is sold, directors' salaries will need to be increased by $50,000each yearin total.A suitable Price/Earnings (P/E)ratio is 7, and the rate of corporate tax is 20%.What is the value of the company using a P/E valuation?

• $4,900,000
• $5,250,000
• $5,530,000
• $4,970,000

A new company was set up two years ago usingthepersonal financial resourcesof the founders.These funds wereused to acquiresuitable premises.The company has entered into a long-term lease on thepremiseswhich arenot yet fully fitted out.The founders are consideringrequesting loan finance fromthe company'sbank to fund the purchase of custom-made advanced technology equipment.No other companiesareusing this type of equipment.The companyexpectsto continue to be profitable for the forseeable future.It re-invests some of its surplus cash in on-going essential research and development.WhichTHREEof the following features are likely to be considered negatives by the bank when assessing the company's credit-worthiness?

• The equipment is advanced technology custom-made equipment.
• The company will continue to remain profitable andto generatenet cash.
• The company premises are on a long-term lease butarenot yet fully fitted out.
• The founders invested their personal financial resources in the company.
• Essential on-going research and development expenditure is required.

A venture capitalist invests in a company by means of buying:* 9million shares for$2 a share and* 8% bonds with anominalvalue of $2 million, repayableat par in 3 years' time.The venture capitalist expects a return on the equity portion of the investment of at least 20% a year on a compound basis over the first 3 years of the investment.The company has 10 million shares in issue.What is the minimum total equity value for the company in 3 years' time required to satisify the venture capitalist's expected return?Give your answer to the nearest$million.$ million.

A venture capitalist invests in a company by means of buying:* 9million shares for$2 a share and* 8% bonds with anominalvalue of $2 million, repayableat par in 3 years' time.The venture capitalist expects a return on the equity portion of the investment of at least 20% a year on a compound basis over the first 3 years of the investment.The company has 10 million shares in issue.What is the minimum total equity value for the company in 3 years' time required to satisify the venture capitalist's expected return?Give your answer to the nearest$million.$ million.

A profitable company wishes to dispose ofa loss-makingdivision thatgenerated negative free cashflow in the last financial year.The division requires significant new investment to return it to profitability.Which of the following valuation approaches is likely to be the most useful to the company when negotiating the sales price?

• Dividend growth model
• Asset basis
• Discounted forecast free cashflow
• P/E ratio applied to forecast earnings next year

A company needs to raise $20 million to finance a project.It has decided on a rights issue at a discount of 20% to its current market share price.There are currently 20 million shares in issuewith a nominal value of $1 and a marketprice of $5per share.Calculate the terms of the rights issue.

• 1 new share for every 4 existing shares
• 1 new share for every 20 existing shares
• 1 new share for every 5 existing shares
• 1 new share for every 25 existing shares

A company has in a 5% corporate bond in issue on which there are two loan covenants.* Interest covermust not fall below 3 times* Retained earnings for the yearmust not fall below $3.5 millionThe 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?

• The company will be in compliance with both covenants.
• The company will be in breach of both covenants.
• The company will breach the covenant in respect of retained earnings only.
• The company will be in breach of the covenant in respect of interest cover only.

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?

• Company B has a greater profit this year than Company A.
• Company B has higherbusiness risk than Company A.
• Company B has higher expected future growth than Company A.
• Company B has higher gearing than Company A.