Changing the Concept of F3 Exam Preparation 2023
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NEW QUESTION 164
Company A plans to acquire Company B in a 1-for-1 share exchange.
Pre-acquisition information is as follows:
Post-acquisition information is as follows:
* Annual earnings are expected to increase by $4 million.
* The P/E multiple of the combined company is expected to be 12 times.
If the acquisition proceeds, what is the expected percentage increase in the post acquisition share price of Company A?
- A. 6%
- B. 8%
- C. 0%
- D. 50%
Answer: C
NEW QUESTION 165
Modigliani and Miller are the main proponents of the view that the dividend policy is irrelevant to the value of a company's shares.
They argue that a company that continually reinvests its entire earnings would generate the same shareholder wealth if it engaged in a policy of high dividends and financed its expansion with funds obtained from rights issues.
Which THREE of the following statements are assumptions that are required in order to support this proposition?
- A. Investors do not always have access to perfect information.
- B. Investors act in a rational manner.
- C. There is a multiplicity of corporate and personal income tax rates.
- D. The capital markets are efficient markets.
- E. There are no transaction costs involved in the issue of new shares (including rights issues).
Answer: B,D,E
Explanation:
Explanation
Discursive_F0
NEW QUESTION 166
A company's main objective is to achieve an average growth in dividends of 10% a year.
In the most recent financial year:
Sales are expected to grow at 8% a year over the next 5 years.
Costs are expected to grow at 5% a year over the next 5 years.
What is the minimum dividend payout ratio in 5 years' time that would allow the company to achieve its objective?
- A. 22.5%
- B. 30.0%
- C. 21.7%
- D. 27.5%
Answer: C
NEW QUESTION 167
The competition authorities are investigating the takeover of Company Z by a larger company, Company
Y.
Both companies are food retailers.
The takeover terms involve using a part cash, part share exchange means of payment.
Company Z is resisting the bid, arguing that it undervalues its business, while lobbying extensively among politicians to sway public opinion against the bidder.
Which of the following actions by Company Y is most likely to persuade the competition authorities to approve the acquisition?
- A. Company Y guarantees to preserve employment at its cental distribution depot.
- B. Company Y agrees to dispose of specified outlets which geographically overlap those of Company Z.
- C. Company Y undertakes to pass on any cost savings to customers.
- D. Company Y increases the cash element of its bid offer.
Answer: B
NEW QUESTION 168
PTT has a number of subsidiary companies around the world, including FTT based in Europe and CTT based in Indonesia
CTT purchases all of us raw materials from FTT CTT processes these materials and the resulting products are exported to several different countries CTT pays FTT in the Indonesian currency.
Indonesia's inflation is higher than that of FTTs home country
Which of the following statements are correct?
Select ALL that apply
- A. FTT could ask for ail payments to K to be made in its home currency, which would reduce exposure to currency risk
- B. CTT will be exposed to translation risk because FTT will almost certainly have to reflect the changing prices in its selling price and it will be difficult for CTT to make a profit
- C. FTT will be exposed to transaction risks as the Indonesian currency will appreciate over time because of the expected inflation rates
- D. FTT will be exposed to transaction risk The Indonesian currency that it receives Is likely to decline over time because of anticipated inflation
- E. FTT could investigate whether it could import anything from Indonesia in order to create a natural hedge.
Answer: A,C,D
NEW QUESTION 169
A national rail operating company has made an offer to acquire a smaller competitor.
Which of the following pieces of information would be of most concern to the competition authorities?
- A. The board informed a major institutional shareholder about the proposed acquisition before informing other shareholders.
- B. The acquisition is likely to result in significant redundancies of staff currently working for the smaller rail operator.
- C. After the acquisition, the board proposes to increase prices on some routes not serviced by other rail operators.
- D. After the acquisition, the board proposes to withdraw some of the less profitable services.
Answer: C
NEW QUESTION 170
A listed publishing company owns a subsidiary company whose business activity is training.
It wishes to dispose of the subsidiary company.
The following information is available:
The board of the publishing company believe that the value of the subsidiary company, and hence the value of the equity invested in it, can be determined by calculating the present value of the subsidiary's free cashflows.
Which of the following is the most appropriate discount rate to use when determining the enterprise value of the company?
- A. A cost of equity that reflects the asset beta of a listed company that provides training activities.
- B. A WACC that the reflects the gearing of the publishing company and the equity beta factor of the publishing company.
- C. A WACC that reflects the gearing of the subsidiary company and the asset beta of a listed company that provides training activities.
- D. A WACC that reflects the gearing of the publishing company and the asset beta of a listed company that provides training activities.
Answer: D
NEW QUESTION 171
XYZ has a variable rate loan of $200 million on which it is paying interest of Liber ' 3%.
XYZ entered into a swap with AG bank to convert this to a fixed rate 8% loan. AB bank charges an annual commission of 0.4% for making this arrangement Calculate the net payment from KYZ to AB bank at the end of the first year if Libor was 2% throughout the year.
Give your answer in $ million, to one decimal place.
Answer:
Explanation:
22.8
NEW QUESTION 172
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 cost of debt will increase above 4%
- B. The WACC increase above 7.6
- C. The WACC will decrease below 7.6%
- D. The cost of equity will decrease below 10%
- E. The cost of equity will increase above 10%
- F. The cost of debt remain unchanged at 4%
Answer: B,C
NEW QUESTION 173
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. Decrease in employee motivation due to internal changes.
- B. Cost savings from synergistic benefits and economies of scale.
- C. Changes to supplier relationships owing to internal changes.
- D. Competition authorities step in to stop a potential price monopoly.
- E. Increase in customer base.
Answer: A,B,C,E
NEW QUESTION 174
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 5 existing shares
- D. 1 new share for every 25 existing shares
Answer: B
NEW QUESTION 175
A company is considering taking out $10.000,000 of floating rate bank borrowings to finance a new project.
The current rate available to the company on floating rate barrowings is 8%. The borrowings contain a covenant based on an interested cover of 5 times.
The project is expected to generate the following results:
At what interest rate on the floating rate borrowings is the bank covenant first breached?
- A. 9.4%
- B. 10.0%
- C. 11.0%
- D. 8.0%
Answer: C
NEW QUESTION 176
Company P is a pharmaceutical company listed on an alternative investment market.
The company is developing a new drug which it hopes to market in approximately six years' time.
Company P is owned and managed by a group of doctors who wish to retain control of the company. The company operates from leased laboratories with minimal fixed assets.
Its value comes from the quality of its research staff and their research.
The company currently has one approved drug which generates sufficient cashflow to cover day to day operations but not sufficient for major new research and development.
Company P wish to raise debt finance to develop the new drug.
Recommend which of the following types of debt finance would be most appropriate for Company P to help finance the development of this new drug.
- A. 5% Bond repayable at par in 7 years' time.
- B. 3% Commercial Paper.
- C. 4% Convertible bond with a conversion ratio of 350 ordinary shares per bond.
- D. 6% Eurobond repayable at par in 5 years' time.
Answer: C
NEW QUESTION 177
A company is considering a divestment via either a management buyout (MBO) or sale to a private equity purchaser. Which of the following is an argument in favour of the MBO from the viewpoint of the original company?
- A. Enhanced big data opportunities.
- B. Improved relationships with management buyout team in the event of a sale to the private equity purchaser.
- C. Higher price due to synergistic benefits.
- D. Better co-operation post divestment.
Answer: D
NEW QUESTION 178
A company is planning to repurchase some of its shares. Relevant details are as follows:
* 100 million shares in issue
* Current share price $5
* 5 million shares to be repurchased
* 10% repurchase premium
* Repurchased shares to be cancelled
What would you expect the share price after the repurchase to be?
Give your answer to two decimal places.
Answer:
Explanation:
$ ?
4.97, 4.98
NEW QUESTION 179
The long-term prospects for inflation in the UK and the USA are 1% and 4% per annum respectively.
The GBP/USD spot rate is currently GBP/USD1.40
Using purchasing power parity theory, what GBP/USD spot rate would you expect to see in six months' time?
- A. GBP/USD1.38
- B. GBP/USD1.44
- C. GBP/USD1.36
- D. GBP/USD1.42
Answer: D
NEW QUESTION 180
Company A is planning to acquire Company B.
Company A's managers think they can improve the performance of Company B to the extent that its own P/E ratio should be applied to Company B's earnings.
Relevant Data:
What is the expected synergy if the acquisition goes ahead?
Give your answer to the nearest $ million.
$ ? million
- A. 8, 8000000
- B. 7, 8000000
Answer: A
NEW QUESTION 181
Company Y plans to diversify into an activity where Company X has an equity beta of 1.6, a debt beta of zero and gearing of 50% (debt/debt plus equity).
The risk-free rate of return is 5% and the market portfolio is expected to return 10%.
The rate of corporate income tax is 30%.
What would be the risk-adjusted cost of equity if Company Y has 60% equity and 40% debt?
- A. 11.6%
- B. 11.9%
- C. 13%
- D. 9.1%
Answer: B
NEW QUESTION 182
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. YS57.14 million
- B. YS1 60 million
- C. YS6.67 million
- D. YS2 29 million
Answer: D
NEW QUESTION 183
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. The shareholder was confusing the cost of capital with shareholder wealth
- C. Reducing the gearing ratio has reduced the financial risk of WW which will benefit shareholders
- D. 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
- E. A lower gearing ratio will result in an increase in the value of the company
- F. A lower gearing ratio creates greater flexibility for WW in the future
Answer: A,C,E
NEW QUESTION 184
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