Use Real F3 - 100% Cover Real Exam Questions [Oct-2021]
Dumps Brief Outline Of The F3 Exam - DumpsActual
NEW QUESTION 82
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?
- A. $10 million irrespective of finance
- B. $210 million if financed by equity
- C. $160 million if financed by a mixture of debt and equity
- D. $50 million if financed by debt
Answer: D
NEW QUESTION 83
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. 46%
- C. 43%
- D. 44%
Answer: D
NEW QUESTION 84
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. 9.3%
- B. 12.3%
- C. 11.4%
- D. 10.1%
Answer: B
NEW QUESTION 85
Which THREE of the following non-financial objectives would be most appropriate for a listed company in the food retailing industry?
- A. Reduce raw material wastage
- B. Reduce customer complaints
- C. Reduce production time
- D. Increase customer service quality
- E. Improve staff morale
Answer: B,D,E
NEW QUESTION 86
A company is wholly equity funded. It has the following relevant data:
* Dividend just paid $4 million
* Dividend growth rate is constant at 5%
* The risk free rate is 4%
* The market premium is 7%
* The company's equity beta factor is 1.2
Calculate the value of the company using the Dividend Growth Model.
Give your answer in $ million to 2 decimal places.
$ ? million
Answer:
Explanation:
56.76, 56.75
NEW QUESTION 87
Company A is a listed company that produces pottery goods which it sells throughout Europe. The pottery is then delivered to a network of self employed artists who are contracted to paint the pottery in their own homes.
Finished goods are distributed by network of sales agents.The directors of Company A are now considering acquiring one or more smaller companies by means of vertical integration to improve profit margins.
Advise the Board of Company A which of the following acquisitions is most likely to achieve the stated aim of vertical integration?
- A. A pottery factory in the Middle East.
- B. A company that produces accessories.
- C. A company in a similar market to Company A.
- D. A listed international logistics firm.
Answer: D
NEW QUESTION 88
A company has a covenant on its 5% long term corporate bond.
* Covenant - The earnings must not fall below $7 million
The bond has a nominal value of $60 million.
It is currently trading at 80% of its nominal value.
The projected earnings before interest and taxation for next year are $11.5 million.
The company retains 80% of its earnings. It pays tax at 20%.
Advise the Board of Directors which of the following covenant conditions will apply next year?
- A. The earnings will be = $5.44 million (The covenant will be breached).
- B. The earnings will be = $11.50 million (The covenant will not be breached).
- C. The earnings will be = $7.28 million (The covenant will not be breached).
- D. The earnings will be = $6.80 million (The covenant will be breached).
Answer: D
NEW QUESTION 89
An unlisted company wishes to obtain an estimated value for its shares in anticipation of a private sale of a large parcel of shares.
Relevant data for the unlisted company:
* It has a residual dividend policy.
* It has earnings that are highly sensitive to underlying economic conditions.
* It is a small business in a large industry where there are listed companies but there are none with a similar capital structure.
The company intends to base valuations on the cost of equity of a proxy company after adjusting for any differences in capital structure where appropriate.
Which of the following methods is likely to give the most accurate equity value for this unlisted company?
- A. P/E based valuation using the P/E of a similar listed company in the same industry.
- B. Net asset valuation.
- C. Dividend valuation model.
- D. Discounted cash flow analysis at WACC based on free cash flow to equity.
Answer: C
NEW QUESTION 90
Company A is planning to acquire Company B at a price of $ 65 million by means of a cash bid.
Company A is confident that the merged entity can achieve the same price earnings ratio as that of Company A.
What does Company A expect the value of the merged entity to be post acquisition?
- A. $156.0 million
- B. $187.5 million
- C. $207.0 million
- D. $122.5 million
Answer: D
NEW QUESTION 91
A project requires an initial outlay of $2 million which can be financed with either a bank loan or finance lease.
The company will be responsible for annual maintenance under either option.
The tax regime is:
* Tax depreciation allowances can be claimed on purchased assets.
* If leased using a finance lease, tax relief can be claimed on the interest element of the lease payments and also on the accounting depreciation charge.
The trainee management accountant has begun evaluating the lease versus buy decision and has produced the following data. He is not confident that all this information is relevant to this decision.
Using only the relevant data, which of the following is correct?
- A. The bank loan is $30,000 MORE expensive than the finance lease.
- B. The bank loan is $20,000 LESS expensive than the finance lease.
- C. The bank loan is $70,000 LESS expensive than the finance lease.
- D. The bank loan is $120,000 LESS expensive than the finance lease.
Answer: C
NEW QUESTION 92
A company proposes to value itself based on the net present value of estimated future cash flows.
Relevant data:
* The cash flow for the next three years is expected to be £100 million each year
* The cash flow after year 3 will grow at 2% to perpetuity
* The cost of capital is 12%
The value of the company to the nearest $ million is:
- A. $889 million
- B. $1,260 million
- C. $966 million
- D. $834 million
Answer: C
NEW QUESTION 93
Company A is unlisted and all-equity financed. It is trying to estimate its cost of equity.
The following information relates to another company, Company B, which operates in the same industry as Company A and has similar business risk:
Equity beta = 1.6
Debt:equity ratio 40:60
The rate of corporate income tax is 20%.
The expected premium on the market portfolio is 7% and the risk-free rate is 5%.
What is the estimated cost of equity for Company A?
Give your answer to one decimal place.
? %
Answer:
Explanation:
12.3, 12.30
NEW QUESTION 94
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. Cost savings from synergistic benefits and economies of scale.
- B. Decrease in employee motivation due to internal changes.
- C. Competition authorities step in to stop a potential price monopoly.
- D. Increase in customer base.
- E. Changes to supplier relationships owing to internal changes.
Answer: A,B,D,E
NEW QUESTION 95
A Venture Capital Fund currently holds a significant shareholding in a large private company as a result of funding a recent management buyout. It plans to exit this investment in 5 years time at a significant profit.
Which THREE of the following exit mechanisms are most likely to be preferred by the Venture Capital Fund?
- A. The Venture Capital Fund has an option to sell its shareholding to the company at twice its original cost which can be exercised in 5 years time.
- B. The management team has an option to buy the Venture Capital Fund's shares for their nominal value which can be exercised in 5 years time.
- C. The Venture Capital Fund has a legal entitlement to sell its shareholding to any third party investor if the company has not obtained a stock market listing within 5 years.
- D. The management team agrees to buy back the Venture Capital Funds shareholding in 5 years time at its original cost.
- E. The private company obtains a stock market listing on a recognised exchange within the next 5 years.
Answer: A,C,E
NEW QUESTION 96
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. Bank loan
- B. Bonds with warrants
- C. Finance lease
- D. Standard bonds
Answer: B
NEW QUESTION 97
A listed company follows a policy of paying a constant dividend. The following information is available:
* Issued share capital (nominal value $0.50) $60 million
* Current market capitalisation $480 million
The shareholders are requesting an increased dividend this year as earnings have been growing. However, the directors wish to retain as much cash as possible to fund new investments. They therefore plan to announce a
1-for-10 scrip dividend to replace the usual cash dividend.
Assuming no other influence on share price, what is the expected share price following the scrip dividend?
Give your answer to 2 decimal places.
$ ?
Answer:
Explanation:
3.64, 3.63, 3.65
NEW QUESTION 98
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?
- A. Company C - it can borrow at L +1 1/2 and fixed at 9%
- B. Company E - it can borrow floating at L +1 1/2 and fixed at 12%
- C. Company A - it can borrow floating L +1 1/2 and fixed at 9.5%
- D. Company D - it can borrow at L +1 1/2 and fixed at 10.5%
Answer: A
NEW QUESTION 99
An entity prepares financial statements to 30 June.
During the year ended 30 June 20X2 the following events occurred:
1 July 20X1
* The entitiy borrowed $100 million at a variable rate of interest.
* In order to protect itself against the variability of its interest cashflows, the entity entered into a pay-fixed-receive-variable interest swap with annual settlements. The fair value of the swap on this date was zero.
30 June 20X2
* The entity received a net settlement of $2 million under the swap. After this net settlement, the fair value of the swap was $5 million - a financial asset.
The entity decides to use hedge accounting for this arrangement and has designated it as a cash flow hedge.
The swap is a perfect hedge of the variability of the cash interest payments.
Which of the following describes the treatment of the settlement and the change in the fair value of the swap in the statement of profit or loss and other comprehensive income for the year ended 30 June 20X2?
- A. $5 million is recognised in profit or loss and $2 million is recognised in other comprehensive income.
- B. $7 million is recognised in other comprehensive income.
- C. $7 million is recognised in profit or loss.
- D. $2 million is recognised in profit or loss and $5 million is recognised in other comprehensive income.
Answer: D
NEW QUESTION 100
A company's gearing is well below its optimal level and therefore it is considering implementing a share re-purchase programme.
This programme will be funded from the proceeds of a planned new long-term bond issue.
Its financial projections show no change to next year's expected earnings.
As a result, the company plans to pay the same total dividend in future years.
If the share re-purchase is implemented, which THREE of the following measures are most likely to decrease?
- A. The number of shares in issue
- B. The cost of equity
- C. Next year's dividend per share
- D. The gearing, based on book value (debt / (debt + equity))
- E. The interest cover
- F. The Weighted Average Cost of Capital
Answer: A,E,F
NEW QUESTION 101
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.
- A. It does not account for the intangible assets.
- B. It does not account for tangible assets.
- C. It accounts for intangible assets at net realisable value.
- D. It accounts for the intangible assets at historical value.
Answer: A
NEW QUESTION 102
A listed company has suffered a period of falling revenues and profit margins. It has been obliged to issue a profit warning to the market and its share price has fallen sharply. The company relies heavily on debt finance and is discussing with its banks possible refinancing options to assist with a restructuring programme.
Which THREE of the following are likely to be of MOST interest to the company's banks when they review the refinancing requests?
- A. Shareholder profile
- B. Book value of assets
- C. Cash flow forecasts
- D. Current capital structure
- E. Trends in share price movements
Answer: C,D,E
NEW QUESTION 103
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