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New CIMAPRA19-F03-1 exam Free Sample Questions to Practice
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NEW QUESTION 154
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. 21.7%
- B. 22.5%
- C. 27.5%
- D. 30.0%
Answer: A
NEW QUESTION 155
A listed company plans to raise $350 million to finance a major expansion programme.
The cash flow projections for the programme are subject to considerable variability.
Brief details of the programme have been public knowledge for a few weeks.
The directors are considering two financing options, either a rights issue at a 20% discount to current share price or a long term bond.
The following data is relevant:
The company's share price has fallen by 5% over the past 3 months compared with a fall in the market of 3% over the same period.
The directors favour the bond option.
However, the Chief Accountant has provided arguments for a rights issue.
Which TWO of the following arguments in favour of a right issue are correct?
- A. The administrative costs of a rights issue will be lower.
- B. The issue of bonds might limit the availability of debt finance in the future.
- C. The WACC will decrease assuming Modigliani and Miller's Theory of Capital Structure without taxes applies.
- D. The recent fall in the share price makes a rights issue more attractive to the company.
- E. The rights issue will lead to less pressure on the operating cash flows of the programme.
Answer: B,E
NEW QUESTION 156
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 157
X exports goods to customers in a number of small countries Asia. At present, X invoices customers in X's home currency.
The Sales Director has proposed that X should begin to invoice in the customers currency, and the Treasurers considering the implications of the proposal.
Which TWO of the following statement are correct?
- A. The overseas customers may have difficulty obtaining X's name currency with which to make the purchases, so the Sales Director's proposal may increase sales.
- B. X will know advance the amount of home currency it will receive for the export sales.
- C. If the proposal is adopted, X will have a lower effective sales price per unit due to exchange rate fluctuations.
- D. The customer will tear the foreign exchange risk and will only buy from X if they are prepared to accept this.
- E. X may be able to sell the receipts forward.
Answer: A,C
NEW QUESTION 158
Select the most appropriate divided for each of the following statements:
Answer:
Explanation:
NEW QUESTION 159
A company's Board of Directors wishes to determine a range of values for its equity.
The following information is available:
Estimated net asset values (total asset less total liabilities including borrowings):
* Net book value = $20 million
* Net realisable value = $25 million
* Free cash flows to equity = $3.5 million each year indefinitely, post-tax.
* Cost of equity = 10%
* Weighted Average Cost of Capital = 7%
Advise the Board on reasonable minimum and maximum values for the equity.
- A. Minimum value = $25.0 million, and maximum value = $50.0 million
- B. Minimum value = $20.0 million, and maximum value = $50.0 million
- C. Minimum value = $20.0 million, and maximum value = $35.0 million
- D. Minimum value = $25.0 million, and maximum value = $35.0 million
Answer: D
NEW QUESTION 160
Hospital X provides free healthcare to all members of the community, funded by the central Government.
Hospital Y provides healthcare which has to be paid for by the individual patients. It is a listed company, owned by a large number of shareholders.
In comparing the above two organisations and their objectives, which THREE of the following statements are correct?
- A. The performance of X will be appraised primarily on the basis of value for money.
- B. X is a not-for-profit organisation while Y is a for-profit organisation.
- C. X and Y will have the same primary non financial objective - provision of quality of health care.
- D. X and Y have the same primary financial objective - to maximise shareholder wealth.
- E. Only Y is likely to have a mixture of financial and non-financial objectives.
Answer: C
NEW QUESTION 161
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 162
XYZ is a multi-national group with subsidiary AA in Country A and subsidiary BB in Country B.
The capital structures of AA and BB are set up to take advantage of the lower tax rate in Country A Thin capitalisation rules in Country B will limit the ability for either AA or BB to claim tax relief on:
- A. interest paid by AA
- B. interest paid by BB
- C. interest earned by BB.
- D. interest earned by AA
Answer: B
NEW QUESTION 163
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. Taxation is payable on realised capital gains.
- B. Cash consideration is certain whereas Company U's future share price performance is uncertain.
- C. Interest rates on deposit accounts are currently at a historic low and are expected to remain low.
- D. Company U is not expected to change its dividend policy post-acquisition.
- E. There will be no opportunity to participate in the future economic success of Company U.
Answer: A,C,E
NEW QUESTION 164
A listed company is considering either a one-off special divided or a share repurchase scheme to reduce its surplus cash level.
Identify TWO advantages that a one-off special payment has over a share repurchase scheme.
- A. It allows shareholder a choice of option in or out of the payment.
- B. It will reduce the possibility of a hostile takeholder
- C. It is easier to arrange than a share repurchase
- D. It will change balance of share owners.
- E. It would result in a transfer of wealth back to the shareholder
Answer: C,D
NEW QUESTION 165
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?
- A.
- B.
- C.
- D.
Answer: D
NEW QUESTION 166
D has US$10 million to invest over 12 months in either USS or GBP Its options are to invest in USS at the present USS interest rate of 10 18%. or to convert the USS to GBP at the spot rate GBP1 =US$1 61 and invest in GBP at an interest rate of 6.4%.
According to the interest rate parity theory, what will the one year forward rate be?
Give your answer to three decimal places.
- A. 1.668
- B. 1.667
Answer: B
NEW QUESTION 167
On 31 October 20X3:
* A company expected to agree a foreign currency transaction in January 20X4 for settlement on 31 March
20X4.
* The company hedged the currency risk using a forward contract at nil cost for settlement on 31 March
20X4.
* The transaction was correctly treated as a cash flow hedge in accordance with IAS 39 Financial Instruments: Recognition and Measurement.
On 31 December 20X3, the financial year end, the fair value of the forward contract was $10,000 (asset).
How should the increase in the fair value of the forward contract be treated within the financial statements for the year ended 31 December 20X3?
- A. Not recognised in 20X3 as the forward contract is not settled until after the year end.
- B. A $10,000 profit will be recognised within the Income Statement.
- C. Not recognised in 20X3 as the gain will be offset by a loss on the hedged transaction.
- D. A $10,000 profit will be recognised within other comprehensive income.
Answer: D
NEW QUESTION 168
HHH Company has a fixed rate loan at 10.0%, but wishes to swap to variable. It can borrow at the risk-free rate +8%. The bank is currently quoting swap rates of 3.1% (bid) and 3.5% (ask). What net rate will HHH Company pay if it enters into the swap?
- A. Risk-free rate +8%
- B. Risk-free rate +6.5%
- C. Risk-free rate +6.9%
- D. Risk-free rate+3.1%
Answer: D
NEW QUESTION 169
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. The capital markets are efficient markets.
- B. Investors act in a rational manner.
- C. There is a multiplicity of corporate and personal income tax rates.
- D. There are no transaction costs involved in the issue of new shares (including rights issues).
- E. Investors do not always have access to perfect information.
Answer: A,B,D
Explanation:
Explanation
Discursive_F0
NEW QUESTION 170
Company W has received an unwelcome takeover bid from Company B.
The offer is a share exchange of 3 shares in Company B for 5 shares in Company W or a cash alternative of $5.70 for each Company W share.
Company B is approximately twice the size of Company W based on market capitalisation. Although the two companies have some common business interested the main aim of the bid is diversification for Company B.
Company W has substantial cash balances which the directors were planning to use to fund an acquisition.
These plans have not been announced to the market.
The following share price information is relevant.
Which of the following would be the most appropriate action by Company W's directors following receipt of this hostile bid?
- A. Write to shareholders explaining fully why the company's share price is under valued.
- B. Refer the bid to the country's competition authorities.
- C. Pay a one-off special dividend.
- D. Change the Articles of Association to increase the percentage of shareholder votes required to approve a takeover.
Answer: A
NEW QUESTION 171
For which THREE of the following risk categories does IFRS 7 require sensitivity analysis?
- A. Interest rate risk
- B. Liquidity risk
- C. Commodity risk
- D. Credit risk
- E. Currency risk
- F. Supply chain risk
Answer: A,C,E
NEW QUESTION 172
Company AAB is located in country A whose currency is the AS It has a subsidiary, BBA, located m country B that has the BS as its currency AAB has asked BBA to pay BS40 million surplus funds to AAB to assist with a planned new capital investment in country A The exchange rate today is AS1 = BS3
Tax regimes
* Company BBA pays withholding tax of 25% on all cash remitted to the parent company
* Company AAB pays tax of 10% on at cash received from its subsidiary
How much will company AAB have available for investment after receiving the surplus funds from BBA?
- A. A$ 12 million
- B. A$ 81 million
- C. A$ 9 million
- D. A$ 27 million
Answer: C
NEW QUESTION 173
A company has a covenant on its 5% long-term bond, stipulating that its retained earnings must not fall below $2 million.
The company has 100 million shares in issue.
Its most recent dividend was $0.045 per share. It has committed to grow the dividend per share by 4% each year.
The nominal value of the bond is $60 million. It is currently trading at 80% of its nominal value.
Next year's earnings before interest and taxation are projected to be $11.25 million.
The rate of corporate tax is 20%.
If the company increases the dividend by 4%, advise the Board of Directors if the level of retained earnings will comply with the covenant?
- A. Covenant is breached as retained earnings = $1.92 million.
- B. Covenant is not breached as retained earnings = $2.40 million.
- C. Covenant is not breached as retained earnings = $2.10 million.
- D. The covenant is not breached as retained earnings = $4.68 million.
Answer: A
NEW QUESTION 174
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 175
A company generates operating profit of $17.2 million, and incurs finance costs of $5.7 million.
It plans to increase interest cover to a multiple of 5-to-1 by raising funds from shareholders to repay some existing debt. The pre-tax cost of debt is fixed at 5%, and the refinancing will not affect this.
Assuming no change in operating profit, what amount must be raised from shareholders?
Give your answer in $ millions to the nearest one decimal place.
Answer:
Explanation:
$ ?
45.2
NEW QUESTION 176
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