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The F3 exam consists of three sections: A, B, and C. Section A covers financial strategy, risk management, and financial instruments. Section B covers corporate finance, including capital structure, investment decisions, and dividend policy. Section C covers financial analysis, including ratio analysis, trend analysis, and variance analysis. Each section is worth 50 marks and candidates are required to score at least 50% in each section to pass the exam.
NEW QUESTION # 158
Holding cash in excess of business requirements rather than returning the cash to shareholders is most likely to result in lower:
- A. vulnerability to a takeover bid.
- B. return on equity.
- C. liquidity.
- D. net profit.
Answer: B
NEW QUESTION # 159
On 1 January 20X1 a company entered into a S200 million interest rate swap with a bank at a fixed rate of 4% against the 6-month risk-free rate to hedge the interest rale risk on a floating rate borrowing.
6-month risk-free rate was as follows:
What is the net settlement due under the swap contract on 1 July 20X1?
- A. $1 000 000 net receipt to the company.
- B. S1 500.000 net payment by the company.
- C. S1 000 000 net payment by the company.
- D. $1.500.000 net receipt to the company.
Answer: B
NEW QUESTION # 160
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 result in a significant change in control of Company C whereas 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 require the approval of the Competition Authorities but a cash offer would not.
Answer: A
NEW QUESTION # 161
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?
- A. B
- B. D
- C. C
- D. A
Answer: C
NEW QUESTION # 162
WW is a quoted manufacturing company. The Finance Director has addressed the shareholders during WW's annual general meeting-She has told the shareholders that WW raised equity during the year and used the funds to repay a large loan that was maturing, thereby reducing WW's gearing ratio At the conclusion of the Finance Director's speech one of the shareholders complained that it had been foolish for WW to have used equity to repay debt The shareholder argued that the Modigliani and Miller model (with tax) offers proof that debt is cheaper than equity when companies pay tax on their profits.
Which THREE arguments could the Finance Director have used in response to the shareholder?
- A. WW was approaching a debt covenant limit and it was therefore important to reduce gearing.
- B. A lower gearing ratio will result in an increase in the value of the company
- C. The Modigliani and Miller model would only be valid in practice if WW's shareholders were aware of the model and believed in its validity
- D. A lower gearing ratio creates greater flexibility for WW in the future
- E. Reducing the gearing ratio has reduced the financial risk of WW which will benefit shareholders
- F. The shareholder was confusing the cost of capital with shareholder wealth
Answer: A,B,E
NEW QUESTION # 163
Company A is a large well-established listed entertainment company and Company B is a small unlisted company specializing in providing online media streaming.
Company A has a gearing ratio of 60% (using book values) and interest cover of 2.
Company A is considering making an offer for Company B, either a cash offer financial by raising additional debt finance or a share-for-share exchange.
Which of the following is most likely to occur if Company A offers a share-for exchange rather than offering cash finance by raising debt?
- A. Earnings per share would be higher.
- B. Gearing would be lower.
- C. There would be no dilution f of control.
- D. Divided per share would be higher.
Answer: B
NEW QUESTION # 164
Select the category of risk for each of the descriptions below:
Answer:
Explanation:
NEW QUESTION # 165
A company has recently announced a scrip issue of 1 new share for every 4 existing shares. The market value of each share price before the announcement was $20.00.
What is the best estimate of the share price after the scrip issue ignoring all other influences on the share price?
- A. $25 00
- B. $20 00
- C. $40 00
- D. $16 00
Answer: D
NEW QUESTION # 166
Select the most appropriate divided for each of the following statements:
Answer:
Explanation:
NEW QUESTION # 167
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?
- A. Shareholder control will remain with AB's current shareholders
- B. Gearing will increase.
- C. EPS Mil Increase
- D. WACC will increase f credit worthless falls too low, further increasing the returns to shareholders.
- E. More of the synergistic benefits of the acquisition will accrue to AB's current shareholders.
Answer: B
NEW QUESTION # 168
Company A is planning to acquire Company B by means of a cash offer. The directors of Company B are prepared to recommend acceptance if a bid price can be agreed. Estimates of the net present value (NPV) of future cash flows for the two companies and the combined group post acquisition have been prepared by Company A's accountant. There are as follows:
What is the maximum price that Company A should offer for the shares in Company B?
Give your answer to the nearest $ million
Answer:
Explanation:
150
NEW QUESTION # 169
Company ABD and Company BCD operate in the same industry and each has a significant market share.
The directors of Company ABD have heard rumours in the market that Company BCD is planning to bid to takeover Company ABD. They do not believe the takeover would be in the best interests of the shareholders and are therefore keen to prevent the bid from going ahead.
Which THREE of the following defense strategies could be used by the directors of Company ABD at this point in time?
- A. Refer the bid to the competition authorities
- B. Revalue the non-current assets
- C. Communicate effectively with their shareholders
- D. Poison Pill
- E. White Knight
Answer: B,C,D
NEW QUESTION # 170
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 3Q°/o 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?
- A. $155.14 million
- B. $111 39 million
- C. $146 39 million
- D. $120 14 million
Answer: B
NEW QUESTION # 171
SUP is a large supermarket chain. It produces many 'own brand' goods in Country S where the parent company is located. These goods are sold in SUP's supermarkets in Country S as well as being sold at a 'transfer price' to SUP companies located in foreign countries for sale in the SUP supermarkets located in that country.
Which of the following factors is the most important for SUP from a lax planning and compliance viewpoint when setting prices for the 'own brand' goods sold to other group companies'?
- A. The price should be the same as the price that would be charged by SUP to other, independent, supermarkets that are located in the same foreign country as the group company that requires the goods.
- B. The price should be much lower than average if the group company that is purchasing the goods has a higher marginal tax rate than the SUP parent company.
- C. The price should be higher than for other group companies if the group company that is purchasing the goods has a higher marginal tax rate than the SUP parent company.
- D. Complying with tax thin capitalisation regulations that apply in both tax jurisdictions.
Answer: D
NEW QUESTION # 172
Company XXY operates in country X with the X$ as its currency. It is looking to acquire company ZZY which operates in country Z with the Z$ as its currency.
The assistant accountant at Company XXY has started to prepare an initial valuation of Company ZZY's equity for the first 3 years, however their valuation is incomplete. TBC' in the table below indicates that her calculations have yet to be completed.
The following information is relevant:
What is the correct figure (to the nearest million S) to include in year 3 as the present value in X$ million?
- A. X$504 million
- B. X$401 million
- C. X$453 million
- D. X$360 million
Answer: D
NEW QUESTION # 173
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 D - it can borrow at L +1 1/2 and fixed at 10.5%
- C. Company A - it can borrow floating L +1 1/2 and fixed at 9.5%
- D. Company E - it can borrow floating at L +1 1/2 and fixed at 12%
Answer: A
NEW QUESTION # 174
A financial services company reported the following results in its most recent accounting period:
The company has an objective to achieve 5% earnings growth each year. The directors are discussing how this objective might be achieved next year.
Revenues have been flat over the last couple of years as the company has faced difficult trading conditions. Revenue is expected to stay constant in the coming year and so the directors are focussing efforts on reducing costs in an attempt to achieve earnings growth next year.
Interest costs will not change because the company's borrowings are subject to a fixed rate of interest.
What operating profit margin will the company have to achieve next year in order to just achieve its 5% earnings growth objective'?
- A. 58.0%
- B. 55.8%
- C. 60.0%
- D. 58.5%
Answer: A
NEW QUESTION # 175
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?
- A. $65.0 million
- B. $41.6 million
- C. $50.2 million
- D. $32.0 million
Answer: B
NEW QUESTION # 176
NNN is a company financed by both equity and debt. The directors of NNN wish to calculate a valuation of the company's equity and at a recent board meeting discussed various methods of business valuation.
Which THREE of the following are appropriate methods for the directors of NNN to use in this instance?
- A. Cash flow to all investors discounted at WACC.
- B. Cash flow to equity discounted at the cost of equity.
- C. Cash flow to equity discounted at the cost of equity less the value of debt.
- D. Total earnings multiplied by a suitable price-earnings ratio.
- E. Cash flow to all investors discounted at WACC less the value of debt.
Answer: B,D,E
NEW QUESTION # 177
Company ADE is an unlisted company; it needs to raise a significant amount of finance to fund future expansion. The directors are considering listing the company on the local stock exchange The following discussions have taken place between some of the directors:
Director A - We consider a public issue of bonds in the capital markets, we don't need to list to issue the bonds which will save time and money.
Director B - We should list on the Alternative Investment Market (AIM) and not the main market to avoid any regulatory requirements Director C - We should remain unlisted; we can access an unlimited amount of equity finance through a rights issue Director D - Listing will increase Company ADE's ability to raise new equity and debt finance in the future.
Director E - If we list, Company ADE will be a more likely target for a takeover than if we remain unlisted.
Which TWO of the directors' statements are correct?
- A. Director B
- B. Director E
- C. Director C
- D. Director A
- E. Director D
Answer: A,E
NEW QUESTION # 178
A company is based in Country Y whose functional currency is YS. It has an investment in Country Z whose functional currency is ZS This year the company expects to generate ZS20 million profit after tax.
Tax Regime
* Corporate income tax rate in Country Y is 60%
* Corporate income tax rate in Country Z Is 30%
* Full double tax relief is available
Assume an exchange rate of YS1 = ZS5
What is the expected profit after tax in YS if the ZS profit is remitted to Country Y?
- A. YS2 29 million
- B. YS6.67 million
- C. YS57.14 million
- D. YS1 60 million
Answer: A
NEW QUESTION # 179
G pic wishes to borrow $5 million in 6 months, for a period of 3 months. A bank has quoted the following Forward Rate Agreement (FRA) rales:
3 v 9 6.55%-6.70% 6v9 6.70%-6 90%.
G pic can borrow at 0 75% above base rate, and the base rate is currently 6.25% Concerned that base rates may rise, G pic decides that it will hedge using an FRA At the settlement date for the FRA, the base rate has risen to 7.50% What is the effective interest rate paid by G pic for its borrowing?
- A. 7.65
- B. 7.30
- C. 8.25
- D. 7.45
Answer: A
NEW QUESTION # 180
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?
- A. It is not an appropriate valuation method for a small, 10% equity stake
- B. CAPM cannot be used to estimate the cost of equity of an unlisted company.
- C. The company is unlikely to achieve constant growth in dividends year-on-year.
- D. The industry average asset beta is not an appropriate beta to use in CAPM in this case.
- E. Future dividend growth is unlikely to reflect historical dividend growth.
Answer: A,C,E
NEW QUESTION # 181
Company A, a listed company, plans to acquire Company T, which is also listed.
Additional information is:
* Company A has 150 million shares in issue, with market price currently at $7.00 per share.
* Company T has 120 million shares in issue,. with market price currently at $6.00 each share.
* Synergies valued at $50 million are expected to arise from the acquisition.
* The terms of the offer will be 2 shares in A for 3 shares in T.
Assuming the offer is accepted and the synergies are realised, what should the post-acquisition price of each of Company A's shares be?
Give your answer to two decimal places.
Answer:
Explanation:
8.24
NEW QUESTION # 182
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