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The Best F3 Exam Study Material and Preparation Test Question Dumps

NEW QUESTION # 144
Company B is an all equity financed company with a cost of equity of 10%.
It is considering issuing bonds in order to achieve a gearing level of 20% debt and 80% equity.
These bonds will pay a coupon rate of 5% and have an interest yield of 6%.
Company B pays corporate tax at the rate of 25%.
According to Modigliani and Miller's theory of capital structure with tax, what will be Company B's new cost of equity?

• A.
• B.
• C.
• D.

Answer: C

NEW QUESTION # 145
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 rights issue will lead to less pressure on the operating cash flows of the programme.
• C. The WACC will decrease assuming Modigliani and Miller's Theory of Capital Structure without taxes applies.
• D. The issue of bonds might limit the availability of debt finance in the future.
• E. The recent fall in the share price makes a rights issue more attractive to the company.

Answer: B,D

NEW QUESTION # 146
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. A
• B. D
• C. B
• D. C

Answer: D

NEW QUESTION # 147
Company X plans to acquire Company Y.
Pre-acquisition information:

Post-acquisition information:
Total combined earnings are expected to increase by 10%
Total combined P/E multiple will remain at 10 times
Which of the following share-for-share exchanges will result in an increase of 10% in Company X's share price post-acquisition?

• A. 2 shares in Company X for 1 shares in Company Y
• B. 3 shares in Company X for 5 shares in Company Y
• C. 1 share in Company X for 2.75 shares in Company Y
• D. 1 share in Company X for 2 shares in Company Y

Answer: B

NEW QUESTION # 148
A company aims to increase profit before interest and tax (PBIT) each year.
The company reports in A$ but has significant export sales priced in B$.
All other transactions are priced in A$.
In 20X1, the company reported:

In 20X2, the only changes expected are:
* An increase in export prices of 10%, but no change to units sold.
* A rise in the value of the B$ to A$/B$ 2.500 (that is, A$ 1 = B$ 2.5)
Is it likely that the company would still meet its objective to grow PBIT between 20X1 and 20X2?

• A. No, PBIT would fall by A$ 150 million.
• B. Yes, PBIT would increase by A$ 48 million.
• C. Yes, PBIT would increase by A$ 150 million.
• D. No, PBIT would fall by A$ 48 million.

Answer: D

NEW QUESTION # 149
Company A plans to acquire Company B, an unlisted company which has been in business for 3 years.
It has incurred losses in its first 3 years but is expected to become highly profitable in the near future.
No listed companies in the country operate the same business field as Company B, a unique new high-risk business process.
The future success of the process and hence the future growth rate in earnings and dividends is difficult to determine.
Company A is assessing the validity of using the dividend growth method to value Company B.
Which THREE of the following are weaknesses of using the dividend growth model to value an unlisted company such as Company B?

• A. The company has been unprofitable to date and hence, there is no established dividend payment pattern.
• B. The future projected dividend stream is used as the basis for the valuation.
• C. The future growth rate in earnings and dividends will be difficult to accurately determine.
• D. The cost of capital will be difficult to estimate.
• E. The dividend growth model does not take the time value of money into consideration.

Answer: B,C,D

NEW QUESTION # 150
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?

• A. $210 million if financed by equity
• B. $160 million if financed by a mixture of debt and equity
• C. $50 million if financed by debt
• D. $10 million irrespective of finance

Answer: C

NEW QUESTION # 151
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.
$ ?

Answer:

Explanation:
4.06, 4.060

NEW QUESTION # 152
Which of the following statements is true of a spin-off (or demerger)?

• A. Raises finance to fund new projects.
• B. Changes the ownership structure of the core entity by introducing new shareholders.
• C. Allows investors to identify the true value of the demerged business.
• D. Increases the risk of a takeover bid for the core entity.

Answer: C

NEW QUESTION # 153
The ex div share price of a company's shares is $2.20.
An investor in the company currently holds 1,000 shares.
The company plans to issue a scrip dividend of 1 new share for every 10 shares currently held.
After the scrip dividend, what will be the total wealth of the shareholder?
Give your answer to the nearest whole $.

Answer:

Explanation:
$ ? .
2200

NEW QUESTION # 154
A company based in Country D, whose currency is the D$, has an objective of maintaining an operating profit margin of at least 10% each year.
Relevant data:
* The company makes sales to Country E whose currency is the E$. It also makes sales to Country F whose currency is the F$.
* All purchases are from Country G whose currency is the G$.
* The settlement of all transactions is in the currency of the customer or supplier.
Which of the following changes would be most likely to help the company achieve its objective?

• A. The D$ weakens against the G$ over time.
• B. The D$ strengthens against the G$ over time.
• C. The F$ weakens against the D$ over time.
• D. The D$ strengthens against the E$ over time.

Answer: B

NEW QUESTION # 155
A company has accumulated a significant amount of excess cash which is not required for investment for the foreseeable future.
It is currently on deposit, earning negligible returns.
The Board of Directors is considering returning this excess cash to shareholders using a share repurchase programme.
The majority of shareholders are individuals with small shareholdings.
Which THREE of the following are advantages of the company undertaking a share repurchase programme?

• A. The earnings per share should increase for the shareholders who do not sell their shares.
• B. Individual shareholders can realise their investment if they wish.
• C. It reduces excess cash which might have been attractive to predators.
• D. It reduces the amount of cash for potential future investment opportunities.
• E. Institutional investors generally prefer a constant predictable income in the form of dividends.

Answer: A,B,C

NEW QUESTION # 156
A listed company is financed by debt and equity.
If it increases the proportion of debt in its capital structure it would be in danger of breaching a debt covenant imposed by one of its lenders.
The following data is relevant:
The company now requires $800 million additional funding for a major expansion programme.
Which of the following is the most appropriate as a source of finance for this expansion programme?

• A. Private placement of a bond
• B. Rights issue
• C. Retained earnings
• D. Bank overdraft

Answer: B

NEW QUESTION # 157
WX, an advertising agency, has just completed the all-cash acquisition of a competitor, YZ. This was seen by the market as a positive strategic move byWX.
Which THREE of the following will WX's shareholders expect the company's directors to prioritise following the acquisition?

• A. The integration and retention of key employees of YZ.
• B. The realisation of anticipated post-acquisition synergies.
• C. The regulatory approval required to complete the acquisition.
• D. The retention of YZ's key customers.
• E. The development of a dividend policy to meet the expectations of the YZ's shareholders.

Answer: A,B,C

NEW QUESTION # 158
ZZZ wishes to borrow at a floating rate and has been told that it can use swaps to reduce the effective interest rate it pays. ZZZ can borrow floating at the risk-free rate + 1, and fixed at 10%.
Which of the following companies would be the most appropriate for ZZZ to enter into a swap with?

• A. Company AAB - it can borrow floating at risk-free rate + % and fixed at 9.5%
• B. Company DDA - it can borrow at risk-free rate + 1 Vz and fixed at 10.5%
• C. Company CCA - it can borrow at risk-free rate + Y% and fixed at 9%
• D. Company BBA - it can borrow floating at risk-free rate +VA and fixed at 12%

Answer: A,C,D

NEW QUESTION # 159
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.

• A. 22.8
• B. 22.9

Answer: A

Explanation:

NEW QUESTION # 160
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