100% Pass Top-selling F3 Exams – New 2023 CIMA Pratice Exam [Q116-Q137]

QUESTION 116
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.

QUESTION 117
At the last financial year end, 31 December 20X1, a company reported:

The corporate income tax rate is 30% and the bank borrowings are subject to an interest cover covenant of 4 times.
The results are presently comfortably within the interest cover covenant as they show interest cover of 8.3 times. The company plans to invest in a new product line which is not expected to affect profit in the first year but will require additional borrowings of $20 million at an annual interest rate of 10%.
What is the likely impact on the existing interest cover covenant?

QUESTION 118
CI IJ has decided to move its production plant to overseas country X.
This would make the product cheaper to produce.
The technology used to make the product is very advanced and some of the skilled staff would have to move to country X.
The Production Director has identified that there are some political risks in moving to county X.
For each of the political risks of moving to country X shown below, select the correct method for reducing the risk.

QUESTION 119
The Board of Directors of a listed company have decided that it needs to increase its equity capital to ensure it is in a more stable financial position.
The shareholder profile is a mix of institutional and individual small shareholders.
The board is considering either:
* A scrip dividend
* A zero dividend
Which THREE of the following would be considered disadvantages of a scrip dividend compared to a zero dividend?

QUESTION 120
Company A is subject to a takeover bid from Company B, both companies operate in the same industry and each of them demand a significant market share Company B h3S made an of an of $5 per share to the shareholders of Company A.
The directors of Company A do not believe the takeover would be in the best interests of the stakeholders and other stakeholders of Company A due to the following reruns
1. Company B has recently taken ever several ether companies resulting in them breaking up the company and se ling on the assets.
2 The directors of Company A believe the offer of $5 per snare undervalues tie company
The directors of Company A are therefore keen to prevent the bid from going ahead
Which THREE of the following defence strategies could be used by the directors of Company Air this situation?

QUESTION 121
A company wishes to raise new finance using a rights issue to invest in a new project offering an IRR of 10% The following data applies:
* There are currently 1 million shares in issue at a current market value of $4 each.
* The terms of the rights issue will be $3.50 for 1 new share for 5 existing shares.
* The company’s WACC is currently 8%.
What is the yield-adjusted theoretical ex-rights price (TERP)?
Give your answer to 2 decimal places.
$ ?

QUESTION 122
TU has relatively few tangible assets and is dependent for profits and growth on the high-value individuals it employs. Which of the following statements best explains why the net asset valuator method’s considered unstable for TU?

QUESTION 123
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.
$ ?

QUESTION 124
Under traditional theory, an increase in a company’s WACC would cause the value of the company to:

QUESTION 125
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?

QUESTION 126
Two companies that operate in the same industry have different Price/Earnings (P/E) ratios as follows:

Which of the following is the most likely of the different P/E ratios?

QUESTION 127
M is an accountant who wishes to take out a forward rate agreement as a hedging instrument but the company treasurer has advised that a short-term interest rate future would be a better option.
Which of the following is true of a short-term interest rate

QUESTION 128
Providers of debt finance often insist on covenants being entered into when providing debt finance for companies.
Agreement and adherence to the specific covenants is often a condition of the loan provided by the lender.
Which THREE of the following statements are true in respect of covenants?

QUESTION 129
KKL is a listed sports clothing company with three separate business units. KKL is seeking to sell TT’, one of these business units
TTP cwns a new. brand of trail running shoes that have Droved hugely popular with lone distance runners. The management team of TTP are frustrated by the constraints imposes b/ KKL in managing tie brand and developing. the bus ness and they believe that TTF has huge growth potential.
The management team of TTP have approached KKL with a proposal to purchase 1~P through a management layout (MDO). KKL has accepted this proposal as TTP has not proved to be a good fit’ with the rest of the business and has agreed on the selling price.
Which THREE of the following factors a-e mast Likely to affect the success of the MBO?

QUESTION 130
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.
$ ?

QUESTION 131
Company A plans to diversify by a cash acquisition of Company B an unlisted company in another country (Country B) which operates in a different industrial sector Company A already manufactures its product in Country B and has a loan denominated in Country B’s currency Company A regularly suffers foreign exchange losses due to volatility in the exchange rate between the two countries’ currencies in recent years.
Which THREE of the following appear to be be valid justifications of this diversification decision?

QUESTION 132
A company is concerned that a high proportion of its debt portfolio consists of variable rate finance with an interest rate of LIBOR ‘ 1 .0%.
It is considering using an interest rate swap to reduce interest rate risk out is concerned about additional finance cost this might create.
A bank has quoted swap rates of 3% 3.5% against LIBOR.
A bank has quoted swap rates of 3% 3.5% against LIBOR.
Is an interest rate swap likely to be beneficial to the company at current LIBOR rates?

QUESTION 133
ADC is planning to acquire DEF in order to benefit from the expertise of DEF’s owner ‘managers Both are Listed companies. ADC is trying to decide whether to offer cash or shares in consideration for DEF’s shares.
Which THREE of the following are advantages to ABC of offering shares to acquire CEF?

QUESTION 134
Company A has made an offer to acquire Company Z.
Both companies are quoted and their current market share prices are:
* Company A – $4
* Company Z – $5
Shareholders in company Z have been given three alternative offers:
* Cash of $5.50 per share
* Share for share exchange on the basis of 3 for 2
* 10.5% long dated bond for every 20 shares
The bond is has a nominal value of $100 and the expected yield on bonds of similar risk is 10%.
You are advising a Company Z shareholder on the three offers.
She requires a 15% premium if she is to accept the offer.
In providing your advice, which of the following statements is correct?

QUESTION 135
A company is currently all-equity financed with a cost of equity of 9%.
It plans to raise debt with a pre-tax cost of 3% in order to buy back equity shares.
After the buy-back, the debt-to-equity ratio at market values will be 1 to 2.
The corporate income tax rate is 25%.
Which of the following represents the company’s cost of equity after the buy-back according to Modigliani and Miller’s Theory of Capital Structure with taxes?

QUESTION 136
A company has some 7% coupon bonds in issue and wishes to change its interest rate profile.
It has decided to do this by entering into a plain coupon interest rate swap with it’s bank.
The bank has quoted a swap rate of: 6.0% – 6.5% fixed against LIBOR.
What will the company’s new interest rate profile be?

QUESTION 137
The value of a call option will increase because of: