Ultimate Guide to the F3 - Latest Oct 17, 2022 Edition Available Now
2022 Updated Verified Pass F3 Exam - Real Questions and Answers
NEW QUESTION 31
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 32
A company plans to cut its dividend but is concerned that the share price will fall.
This demonstrates the _____________ effect
Answer:
Explanation:
clientele
NEW QUESTION 33
Company A is planning to acquire Company B.
Both companies are listed and are of similar size based on market capitalisation No approach has yet been made to Company B's shareholders as the directors of Company A are undecided about the most suitable method of financing the offer Two methods are under consideration a share exchange or a cash offer financed by debt.
Company A currently has a gearing ratio (debt to debt plus equity) of 30% based on market values. The average gearing ratio (debt to debt plus equity) for the industry is 50% Although no formal offer has been made there have been market rumours of the proposed bid. which is seen as favorable to Company A.
As a consequence. Company As share price has risen over the past few weeks while Company B's share price has fallen.
Which THREE of the following statements are most likely to be correct?
- A. Based on current share price movements, a share exchange would mean Company A has to issue fewer shares to acquire Company B than it would have done a few weeks ago
- B. Company A's gearing will increase following a share exchange.
- C. Company A's weighted average cost of capital will fall if financing is with debt
- D. The method of finance chosen will not affect the post-acquisition earning per share of the combined business
- E. Company B's shareholders will be able to participate in the future growth of the combined business if it is a share exchange
Answer: A,C
NEW QUESTION 34
An unlisted company.
* Is owned by the original founders and members of their families
* Pays annual dividends each year depending on the cash requirements of the dominant shareholders.
* Has earnings that are highly sensitive to underlying economic conditions.
* Is a small business in a large Industry where there are listed companies with comparable capital structures
Which of the following methods is likely to give the most accurate equity value for this unlisted company?
- A. Dividend valuation model.
- B. Discounted cash flow analysis at WACC (based on cash flows after tax but before financing) plus the market value of debt.
- C. P/E based valuation using the P/E of a similar company.
- D. Net asset valuation
Answer: A
NEW QUESTION 35
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. $80 million
- C. $24 million
- D. $48 million
Answer: C
NEW QUESTION 36
Company A is located in Country A, where the currency is the A$.
It is listed on the local stock market which was set up 10 years ago.
It plans a takeover of Company B, which is located in Country B where the currency is the B$, and where the stock market has been operating for over 100 years.
Company A is considering how to finance the acquisition, and how the shareholders of Company B might respond to a share exchange or cash (paid in B$).
Which of the following is likely to explain why the shareholders of Company B would prefer a share exchange as opposed to a cash offer?
- A. It would allow them to realise their investment and make a capital gain.
- B. It would avoid them being exposed to foreign currency risk.
- C. They would receive shares in a market that is likely to be more efficient.
- D. It would enable them to benefit from the future performance of the combined entity.
Answer: D
NEW QUESTION 37
A private company manufactures goods for export, the goods are priced in foreign currency B$.
The company is partly owned by members of the founding family and partly by a venture capitalist who is helping to grow the business rapidly in preparation for a planned listing in three years' time.
The company therefore has significant long term exposure to the B$.
This exposure is hedged up to 24 months into the future based on highly probable forecast future revenue streams.
The company does not apply hedge accounting and this has led to high volatility in reported earnings.
Which of the following best explains why external consultants have recently advised the company to apply hedge accounting?
- A. To fully adopt IFRS in preparation for listing the company.
- B. To ensure that the venture capitalist receives regular annual returns on its investment.
- C. To provide a more appropriate earnings figure for use in calculating the annual dividend.
- D. To make it easier for the market to value the business when it is listed on the Stock Exchange.
Answer: D
NEW QUESTION 38
A company generates and distributes electricity and gas to households and businesses.
Forecast results for the next financial year are as follows:
The Industry Regulator has announced a new price cap of $2.00 per Kilowatt.
The company expects this to cause consumption to rise by 15% but costs would remained unaltered.
The price cap is expected to cause the company's net profit to fall to:
- A. $164.00 million profit
- B. $43.00 million profit
- C. $8.75 million profit
- D. $126.50 million loss
Answer: A
NEW QUESTION 39
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 company that produces accessories.
- B. A company in a similar market to Company A.
- C. A listed international logistics firm.
- D. A pottery factory in the Middle East.
Answer: C
NEW QUESTION 40
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 dat a. 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 $120,000 LESS 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 $30,000 MORE expensive than the finance lease.
Answer: C
NEW QUESTION 41
A listed company is financed by debt and equity.
If it increases the proportion of debt in its capital structure it would be in danger of breaching a debt covenant imposed by one of its lenders.
The following data is relevant:
The company now requires $800 million additional funding for a major expansion programme.
Which of the following is the most appropriate as a source of finance for this expansion programme?
- A. Private placement of a bond
- B. Rights issue
- C. Retained earnings
- D. Bank overdraft
Answer: B
NEW QUESTION 42
A company has an opportunity to invest in a positive net present value project, but the project would require debt finance that would push the company's gearing ever a limit imposed by a debt covenant on an existing loan.
Which THREE of the following actions could be taken by the company?
- A. The directors could meet with key shareholder to discuss whether they wish the project proceed despite the breach of the covenant
- B. The project could be foregone if it cannot be funded without breaching the covenant
- C. The company could approach its existing Lenders to negotiate a relaxation of :he conditions imposed by the covenant.
- D. The project could proceed if the cash inflows from the project will enable some of the debt to be repaid before the end of the financial year and so the breach of covenant may never be detected
- E. The directors could proceed will the project because their primary duly is maximise shared older wealth, even if that conflicts with lenders' interest.
- F. The company could seek alternative sources of finding, such as a reduction in the annual dividend payment, to finance the project.
Answer: B,C,F
NEW QUESTION 43
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?
- A. Refer the bid to the country's competition authorities.
- B. Change the Articles of Association to increase the percentage of shareholder votes required to approve a takeover.
- C. Write to shareholders explaining fully why the company's share price is under valued.
- D. Pay a one-off special dividend.
Answer: C
NEW QUESTION 44
Which of the following statements is true of a spin-off (or demerger)?
- A. Allows investors to identify the true value of the demerged business.
- B. Increases the risk of a takeover bid for the core entity.
- C. Raises finance to fund new projects.
- D. Changes the ownership structure of the core entity by introducing new shareholders.
Answer: A
NEW QUESTION 45
An all equity financed company reported earnings for the year ending 31 December 20X1 of $8 million.
One of its financial objectives is to increase earnings by 5% each year.
In the year ending 31 December 20X2 it financed a project by issuing a bond with a $1 million nominal value and a coupon rate of 4%.
The company pays corporate income tax at 20%.
If the company is to achieve its earnings target for the year ending 31 December 20X2, what is the minimum operating profit (profit before interest and tax) that it must achieve?
- A. $8.40 million
- B. $6.69 million
- C. $10.54 million
- D. $10.50 million
Answer: C
NEW QUESTION 46
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?
- A. Domestic: A$33,750
- B. Domestic: A$41,250
- C. Foreign subsidiary: A$35,000
- D. Foreign subsidiary: A$38,500
Answer: C
NEW QUESTION 47
Company C is a listed company. It is currently considering the acquisition of Company D. The original founder of Company C currently owns 52% of the shares.
Alternative forms of consideration for Company D being considered are as follows:
* Cash payment, financed by new borrowing
* issue of new shares in Company C
Which of the following is an advantage of a cash offer over a share-for exchange from the viewpoint of the original founder of Company C?
- A. A share-for-share exchange would require the approval of the Competition Authorities but a cash offer would not.
- B. A cash offer would result in a lower gearing ratio therefore reduce the weighted overage cost of capital whereas a cash offer would not.
- C. A share-for-share exchange would require the approval shareholders in Company C but a cash offer would not.
- D. A share for share exchange would result in a significant change in control of Company C whereas a cash offer would not.
Answer: D
NEW QUESTION 48
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?
- A. Receive fixed pay floating interest rate swap for $100 million.
- B. Pay fixed receive floating interest rate swap for $50 million.
- C. Receive fixed pay floating interest rate swap for $50 million.
- D. Pay fixed receive floating interest rate swap for $100 million.
Answer: C
NEW QUESTION 49
A company is considering whether to lease or buy an asset.
The following data applies:
* The bank will charge interest at 7.14% per annum
* The asset will cost $1 million
* Tax-allowable depreciation is available on a straight line basis over 5 years
* There is no residual value
* Corporate tax is paid at 30% in the year when the profit is earned
What is the NPV of the buy option?
Give your answer to the nearest $000.
Answer:
Explanation:
$ ?
740
NEW QUESTION 50
AA is considering changing its capital structure. The following information is currently relevant to AA:
The gearing rating raising the new debt finance will be 50%.
Which THREE of the following statement about the impact of AA's change in capital structure are true under Modigliani and Miler's capital structure theory with tax.
- A. The WACC will decrease below 7.6%
- B. The cost of equity will increase above 10%
- C. The cost of debt will increase above 4%
- D. The cost of equity will decrease below 10%
- E. The WACC increase above 7.6
- F. The cost of debt remain unchanged at 4%
Answer: A,E,F
NEW QUESTION 51
Company U has made a bid for the entire share capital of Company B.
Company U is offering the shareholders in Company B the option of either a share exchange or a cash alternative.
Advise the shareholders in Company B which THREE of the following would be considered disadvantages of accepting the cash consideration?
- A. Cash consideration is certain whereas Company U's future share price performance is uncertain.
- B. There will be no opportunity to participate in the future economic success of Company U.
- C. Interest rates on deposit accounts are currently at a historic low and are expected to remain low.
- D. Taxation is payable on realised capital gains.
- E. Company U is not expected to change its dividend policy post-acquisition.
Answer: B,C,D
NEW QUESTION 52
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 issue with a nominal value of $1 and a market price of $5 per share.
Calculate the terms of the rights issue.
- A. 1 new share for every 20 existing shares
- B. 1 new share for every 4 existing shares
- C. 1 new share for every 25 existing shares
- D. 1 new share for every 5 existing shares
Answer: B
Explanation:
Calc_Set2
NEW QUESTION 53
Company A has agreed to buy all the share capital of Company B.
The Board of Directors of Company A believes that the post-acquisition value of the expanded business can be computed using the "boot-strapping" concept.
Which of the following most accurately describes "boot-strapping" in this context?
- A. Adding together the current post-tax earnings of each company and multiplying this by the price/earnings ratio of the bidder
- B. Combining the pre-acquisition market capitalisation of each company
- C. Adding together the current post tax earnings of each company and multiplying this by the price earnings ratio of the acquired entity
- D. Forecasting the future free cash flows of the combined entities and discounting these at the bidder's Weighted Average Cost of Capital
Answer: A
NEW QUESTION 54
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