[Feb 11, 2024] CIMAPRA19-F03-1 Questions Truly Valid For Your CIMA Exam! [Q196-Q211]

QUESTION 196
A consultancy company is dependent for profits and growth on the high value individuals it employs.
The company has relatively few tangible assets.
Select the most appropriate reason for the net asset valuation method being considered unsuitable for such a company.

QUESTION 197
Which of the following would be a reason for a company to adopt a low dividend pay-out policy?

QUESTION 198
Company A plans to diversify by a cash acquisition of Company B an unlisted company in another country (Country B) which operates in a different industrial sector
Company A already manufactures its product in Country B and has a loan denominated in Country B’s currency
Company A regularly suffers foreign exchange losses due to volatility in the exchange rate between the two countries’ currencies in recent years.
Which THREE of the following appear to be be valid justifications of this diversification decision?

QUESTION 199
A company is considering either directly exporting its product to customers in a foreign country or setting up a subsidiary in the foreign country to manufacture and supply customers in that country.
Details of each alternative method of supplying the foreign market are as follows:

There is an import tax on product entering the foreign country of 10% of sales value.
This import duty is a tax-allowable deduction in the company’s domestic country.
The exchange rate is A$1.00 = B$1.10
Which alternative yields the highest total profit after taxation?

QUESTION 200
Using the CAPM, the expected return for a company is 11%. The market return is 8% and the risk free rate is 2%.
What does the beta factor used in this calculation indicate about the risk of the company?

QUESTION 201
An unlisted company has the following data:

A listed company in the same industry has a P/E of 11.
The value of the unlisted company based on the P/E of this listed company is:

Give your answer to the nearest whole number.

QUESTION 202
A company is located in a single country. The company manufactures electncal goods for export and for sale in its home country. When exporting, it invoices in its customers’ currency. What currency risks is the company exposed to?

QUESTION 203
A company plans a four-year project which will be financed by either an operating lease or a bank loan.
Lease details:
* Four year lease contract.
* Annual lease rentals of $45,000, paid in advance on the 1st day of the year.
Other information:
* The interest rate payable on the bank borrowing is 10%.
* The capital cost of the project is $200,000 which would have to be paid at the beginning of the first year.
* A salvage or residual value of $100,000 is estimated at the end of the project’s life.
* Purchased assets attract straight line tax depreciation allowances.
* Corporate income tax is 20% and is payable at the end of the year following the year to which it relates.
A lease-or-buy appraisal is shown below:

Which THREE of the following items are errors within the appraisal?

QUESTION 204
X exports goods to customers in a number of small countries Asi
a. At present, X invoices customers in X’s home currency.
The Sales Director has proposed that X should begin to invoice in the customers currency, and the Treasurers considering the implications of the proposal.
Which TWO of the following statement are correct?

QUESTION 205
Company AD is planning to acquire Company DC. It is evaluating two methods of structuring the terms of the bid, which will be ether a debt-funded cash offer or a share exchange
The following Information is relevant
* The two companies are of similar size and in related industries
* AB’s gearing ratio measured as debt to debt plus equity, is currently 30% based on market values. This Is the company’s optimum capital structure set to reflect the risk appetite of shareholders.
* The combined company is expected to generate savings and synergies
Which THREE of the following are advantages to AB’s shareholders of a debt-funded cash offer compared with a share exchange?

QUESTION 206
An unlisted company is attempting to value its equity using the dividend valuation model.
Relevant information is as follows:
* A dividend of $500,000 has just been paid.
* Dividend growth of 8% is expected for the foreseeable future.
* Earnings growth of 6% is expected for the foreseeable future.
* The cost of equity of a proxy listed company is 15%.
* The risk premium required due to the company being unlisted is 3%.
The calculation that has been performed is as follows:
Equity value = $540,000 / (0.18 – 0.08) = $5,400,000
What is the fault with the calculation that has been performed?

QUESTION 207
The two founding directors of an unlisted geared company want to establish its value as they are intending to approach a venture capitalist for additional funding.
The funding will be used to invest in a major new project which has very high growth potential. The directors intend to sell 10% of the company to the venture capitalist They have prepared the following current valuation of the company using the divided valuation model:

The following information is relevant.
* $60,000 is the most recent dividend paid.
* 4% is the average dividend growth over the last few years.
* 10% is an estimate of the company’s cost of equity using the CAPM model with the industry average asset beta Which THREE of the following are weaknesses of the valuation method used in these circumstances?

QUESTION 208
DFG is a successful company and its shares are listed on a recognised stock exchange. The company’s gearing ratio is currently in line with the industry average and the directors of DFG do not want to increase the company’s financial risk. The company does not carry a large cash balance and its shareholders are not expected to be willing to support a rights issue at this time
LMB is a small services company owned and managed by a small board of directors who are going to retire within the next year
DFG wishes to purchase LMB and has approached LMB’s owners, who are broadly open to the proposal, to discuss the bid and the consideration to be offered by DFG. LMB’s owners explain to DFG that they are also keen to defer any tax liabilities they would be subject to on receipt of the consideration.
Based on the information provided, which of the following types of consideration would be most suitable to finance the acquisition?

QUESTION 209
Z wishes to borrow at a floating rate and has been told that it can use swaps to reduce the effective interest rate it pays. Z can borrow floating at Libor ‘ 1, and fixed at 10%.
Which of the following companies would be the most appropriate for Z to enter into a swap with?

QUESTION 210
Company T is a listed company in the retail sector.
Its current profit before interest and taxation is $5 million.
This level of profit is forecast to be maintainable in future.
Company T has a 10% corporate bond in issue with a nominal value of $10 million.
This currently trades at 90% of its nominal value.
Corporate tax is paid at 20%.
The following information is available:

Which of the following is a reasonable expectation of the equity value in the event of an attempted takeover?

QUESTION 211
A company has forecast the following results for the next financial year:
The following is also relevant:
* Profit after tax for the year can be assumed to be equivalent to free cash flow for the year.
* Debt finance comprises a $10 million floating rate loan which currently carries an interest rate of 5%.
* $400,000 investment in non-current assets is required to achieve required growth, all of which is to financed from next year’s free cash flow.
* The company plans to pay a dividend of $150,000 next year, financed from next year’s free cash flow.
The company is concerned that interest rates could rise next year to 6% which could then affect their investment plans.
If interest rates were to rise to 6% and the company wishes to maintain its dividend amount, the planned investment expenditure will decrease by: