Pass the CIMA Strategic F3 Questions and answers with ExamsMirror

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?

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?

Company AEE has a 10 year 6% corporate bond in issue which has a nominal value of $400 million, which is currently trading at 95%. The bond is secured on the company's property

The Board of Directors has calculated the equity value of Company AEE as follows;

Which THREE of the following are errors in the valuation?

A large, listed company is planning a major project that should greatly improve its share price in the long term.

These plans require a significant capital cost that the company plans to finance by debt.

All of the debt options being considered are for the same duration of time.

Which of the following sources of debt finance is likely to be the most expensive for the company over the full term of the debt?

A company proposes to value itself based on the net present value of estimated future cash flows.

Relevant data:

   • The cash flow for the next three years is expected to be £100 million each year

   • The cash flow after year 3 will grow at 2% to perpetuity

   • The cost of capital is 12%

The value of the company to the nearest $ million is:

Company ABC's management has noticed that Company BCD has quickly built up a 20% stake by buying shares in Company ABC and are concerned that this is the start of a hostile bid.

This build-up of shares triggers the poison pill provision which automatically converts the rights to buy future preference shares previously issued to existing shareholders in Company ABC to full ordinary shares

What is the most likely impact of the triggering of a poison pill strategy at this stage in the bidding process?

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?  

On 1 January:

   • Company X has a value of $50 million

   • Company Y has a value of $20 million

   • Both companies are wholly equity financed

Company X plans to take over Company Y by means of a share exchange. Following the acquisition the post-tax cashflow of Company X for the foreseeable future is estimated to be $8 million each year. The post-acquisition cost of equity is expected to be 10%.

What is the best estimate of the value of the synergy that would arise from the acquisition? 

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?

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?