BEST Verified CIMA F3 Exam Questions (2024) [Q148-Q171]

Q148. 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?

Q149. Which THREE of the following are the most likely exit routes that apply to a venture capitalist?

Q150. Company C invests heavily in Research and Development an need to raise $45 million to finance future projects. It has decided to use equity finance raised by a tender offer, The following tender offers have been received from potential investors:

Company C wishes to select an offer price that will project shareholders from a significant dilution of control but still raise the required amount of finance.
What offer price should Company C’s select?

Q151. RST wishes to raise at least $40 million of new equity by issuing up to 10 million new equity shares at a minimum price of $3.00 under an offer for sale by tender. It receives the following tender offers:

What is the maximum amount that RST can raise by this share issue?
(Give your answer to the nearest $ million).

Q152. Company M is a listed company in a highly technical service industry.
The directors are considering making a cash offer for the shares in Company Q, an unquoted company in the same industry.
Relevant data about Company Q:
* The company has seen consistent growth in earnings each year since it was founded 10 years ago.
* It has relatively few non-current assets.
* Many of the employees are leading experts in their field. A recent exercise suggested that the value of the company’s human capital exceeded the value of its tangible assets.
The directors and major shareholders of Company Q have indicated willingness to sell the company.
Before negotiations become too advanced, the directors of Company M are considering the benefits to their company that would follow the acquisition.
Which THREE of the following are the most likely benefits of the acquisition to Company M’s shareholders?

Q153. Company Z has identified four potential acquisition targets: companies A, B, C and D.
Company Z has a current equity market value of $580 million.
The price it would have to pay for the equity of each company is as follows:
Only one of the target companies can be acquired and the consideration will be paid in cash.
The following estimations of the new combined value of Company Z have been prepared for each acquisition before deduction of the cash consideration:
Ignoring any premium paid on acquisition, which acquisition should the directors pursue?

Q154. Assume today is 31 December 20X1.
A listed mobile phone company has just launched a new phone which is proving to be a great success.
As a direct result of the product’s success, earnings are forecast to increase by:
* 5% a year in each of years 20X2 – 20X6
* 3% from 20X7 onwards
Market analysts were very excited to hear the news of the success of the product and future growth forecasts.
Assuming a semi-efficient market applies, which of the following company valuation methods is likely to give the best estimate of the company’s equity value today?

Q155. Company A needs to raise AS500 mi lion to invest in a new project and is considering using a pub ic issue of bonds to finance the investment.
Which THREE of the following statements-relating to this bond issue are true?

Q156. A company is in the process of issuing a 10 year $100 million bond and is considering using an interest rate swap to change the interest profile on some or all of the $100 million new finance.
The company has a target fixed versus floating rate debt profile of 1:1. Before issuing the bond its debt profile was as follows:

Which of the following is the most appropriate interest rate swap structure for the company?

Q157. Company X is an established, unquoted company which provides IT advisory services.
The company’s results and cashflows are growing steadily and it has few direct competitors due to the very specialised nature of it’s business. Dividends are predictable and paid annually.
Company P is looking to buy 30% of company X’s equity shares.
Which TWO of the following methods are likely to be considered most suitable valuation methods for valuing company P’s investment in Company X?

Q158. A company has undertaken a transaction with its shareholders which has had the following impact on its financial statements:
* Retained earnings has decreased
* Share capital has increased
* Earnings per share has decreased
* The book value of equity is unchanged
The company has undertaken a:

Q159. A company needs to raise $40 million to finance a project. It has decided on a right issue at a discount of 20% to its current market share price.
There are currently 20 million shares in issue with a nominal value of $1 and a market price of $10.00 per share.

Q160. 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?

Q161. A company has:
* A price/earnings (P/E) ratio of 10.
* Earnings of $10 million.
* A market equity value of $100 million.
The directors forecast that the company’s P/E ratio will fall to 8 and earnings fall to $9 million.
Which of the following calculations gives the best estimate of new company equity value in $ million following such a change?

Q162. Listed Company A has prepared a valuation of an unlisted company. Company B. to achieve vertical integration Company A is intending to acquire a controlling interest in the equity of Company B and therefore wants to value only the equity of Company B.
The assistant accountant of Company A has prepared the following valuation of Company B’s equity using the dividend valuation model (DVM):
Where:
* S2 million is Company B’s most recent dividend
* 5% is Company B’s average dividend growth rate over the last 5 years
* 10% is a cost of equity calculated using the capital asset pricing model (CAPM), based on the industry average beta factor

Which THREE of the following are valid criticisms of the valuation of Company B’s equity prepared by the assistant accountant?

Q163. Select the most appropriate divided for each of the following statements:

Q164. G purchased a put option that grants the right to cap the interest on a loan at 10.0%. Simultaneously, G sold a call option that grants the holder the benefits of any decrease if interest rates fall below 8.5%.
Which THREE possible s would be consistent with G’s behavior?

Q165. The financial assistant of a geared company has prepared the following calculation of the company’s equity value:


Useful information;
* Tax rate – 20%
* Cost of equity = 12%
* Weighted average cost of capital (WACC)= 10%
” Debt finance of the company comprises a $6 million 7% undated bond trading at par Valuation workings.
Which of the following errors has been made by the financial assistant?

Q166. A company is financed by debt and equity and pays corporate income tax at 20%.
Its main objective is the maximisation of shareholder wealth.
It needs to raise $200 million to undertake a project with a positive NPV of $10 million.
The company is considering three options:
* A rights issue.
* A bond issue.
* A combination of both at the current debt to equity ratio.
Estimations of the market values of debt and equity both before and after the adoption of the project have been calculated, based upon Modigliani and Miller’s capital theory with tax, and are shown below:

Under Modigliani and Miller’s capital theory with tax, what is the increase in shareholder wealth?

Q167. 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?

Q168. A company plans to cut its dividend but is concerned that the share price will fall.
This demonstrates the _____________ effect

Q169. 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 $4.0 million.
The rate of corporate tax is 25%.
The average P/E multiple of listed companies in the same industry is 8 times current earnings.
The P/E multiple of recent takeovers in the same industry have ranged from 9 times to 10 times current earnings.
The average P/E multiple of the top 100 companies on the stock market is 15 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?

Q170. Company B is an all equity financed company with a cost of equity of 10%.
It is considering issuing bonds in order to achieve a gearing level of 20% debt and 80% equity.
These bonds will pay a coupon rate of 5% and have an interest yield of 6%.
Company B pays corporate tax at the rate of 25%.
According to Modigliani and Miller’s theory of capital structure with tax, what will be Company B’s new cost of equity?
A)

B)

C)

D)

Q171. Company C has received an unwelcome takeover bid from Company P.
Company P is approximately twice the size of Company C based on market capitalisation.
Although the two companies have some common business interests, the main aim of the bid is diversification for Company P.
The offer from Company P is a share exchange of 2 shares in Company P for 3 shares in Company C.
There is a cash alternative of $5.50 for each Company C share.
Company C has substantial cash balances which the directors were planning to use to fund an acquisition.
These plans have not been announced to the market.
The following share price information is relevant. All prices are in $.

Which of the following would be the most appropriate action by Company C’s directors following receipt of this hostile bid?