[Jan-2024 Newly Released] Pass F3 Exam - Real Questions and Answers
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NEW QUESTION # 75
A listed company plans to raise new capital which will be required for future investment projects. The company has a gearing ratio of 50%, which is just below the company's target ratio.
The directors are comparing the benefits and drawbacks of each of the following two alternative sources of finance;
* Unsecured bank borrowings.
* Convertible bonds.
Which of the following statements is correct?
- A. If the convertible bond holders eventually convert to shares the company's gearing ratio will rise whereas it will be unaffected if finance is with unsecured borrowings.
- B. The coupon rate of a convertible bond is likely to be lower than for unsecured borrowings.
- C. If the share price does not increase sufficiently for conversion to take place the company will have more expensive debt with a convertible bond than with unsecured borrowings.
- D. Additional finance will be raised upon conversion of the convertible bond but not with unsecured borrowings.
Answer: D
NEW QUESTION # 76
A venture capitalist invests in a company by means of buying:
* 9 million shares for $2 a share and
* 8% bonds with a nominal value of $2 million, repayable at par in 3 years' time.
The venture capitalist expects a return on the equity portion of the investment of at least 20% a year on a compound basis over the first 3 years of the investment.
The company has 10 million shares in issue.
What is the minimum total equity value for the company in 3 years' time required to satisify the venture capitalist's expected return?
Give your answer to the nearest $ million.
$ million.
- A. 34, 35, 34000000, 35000000
- B. 34, 34, 34000000, 35000000
Answer: A
NEW QUESTION # 77
Which THREE of the following statements are true of a money market hedge?
- A. They leave the company exposed to currency risks.
- B. They are easy to set up.
- C. They are more complex than forward contracts.
- D. They offer roughly the same outcome as a forward contract.
- E. They may be a little more flexible in comparison to a forward contract.
Answer: A,C,D
NEW QUESTION # 78
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?
- A. The motivation of the TTP management team to invest in future growth.
- B. The ability of the TTF management team to take over the head office functions successfully.
- C. The ability the TTP management team to develop the brand and achieve the expected growth.
- D. The constraints imposed by KKL managing TTF's brand.
- E. Searing sufficient. funding for the MBO.
Answer: B,C,E
NEW QUESTION # 79
Company E is a listed company. Its directors are valuing a smaller listed company, Company F, as a possible acquisition.
The two companies operate in the same markets and have the same business risk.
Relevant data on the two companies is as follows:
Both companies are wholly equity financed and both pay corporate tax at 30%.
The directors of Company E believe they can "bootstrap" Company F's earnings to improve performance.
Calculate the maximum price that Company E should offer to Company F's shareholders to acquire the company.
Give your answer to the nearest $million.
- A. 4,500
- B. 3,150
- C. 2,700
- D. 1,890
Answer: B
NEW QUESTION # 80
Integrated reporting is designed to make visible the capitals on which the organisation depends, and how the organisation uses those capitals to create value in the short, medium and long term Which THREE of the following capitals are specifically identified in the Integrated Reporting <IR> Framework?
- A. Financial
- B. Human
- C. Community
- D. Research and Development
- E. Manufactured
Answer: B,E
NEW QUESTION # 81
Which THREE of the following are considered in detail in IFRS 7 Financial Instruments: Disclosures?
- A. Credit risk
- B. Enterprise risk
- C. Market risk
- D. Business risk
- E. Liquidity risk
Answer: A,C,E
NEW QUESTION # 82
Select the category of risk for each of the descriptions below:
Answer:
Explanation:
NEW QUESTION # 83
A venture capitalist invests in a company by means of buying:
* 9 million shares for $2 a share and
* 8% bonds with a nominal value of $2 million, repayable at par in 3 years' time.
The venture capitalist expects a return on the equity portion of the investment of at least 20% a year on a compound basis over the first 3 years of the investment.
The company has 10 million shares in issue.
What is the minimum total equity value for the company in 3 years' time required to satisify the venture capitalist's expected return?
Give your answer to the nearest $ million.
$ million.
- A. 34, 35, 34000000, 35000000
- B. 35, 35, 34000000, 35000000
Answer: A
NEW QUESTION # 84
Company C has received an unwelcome takeover bid from Company P.
Company P is approximately twice the size of Company C based on market capitalisation.
Although the two companies have some common business interests, the main aim of the bid is diversification for Company P.
The offer from Company P is a share exchange of 2 shares in Company P for 3 shares in Company C.
There is a cash alternative of $5.50 for each Company C share.
Company C 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. All prices are in $.
Which of the following would be the most appropriate action by Company C'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 # 85
Company Z wishes to borrow $50 million for 10 years at a fixed rate of interest.
Two alternative approaches are being considered:
1. Issue a 10 year bond at a fixed rate of 6%, or
2. Borrow from the bank at Libor +2.5% for a 10 year period and simultaneously enter into a 10 year interest rate swap.
Current 10 year swap rates against Libor are 4.0% - 4.2%.
What is the difference in the net interest cost between the two alternative approaches?
- A. Approach A is 0.5% a year less expensive
- B. Approach B is 2.2% a year less expensive
- C. Approach A is 0.7% a year less expensive
- D. Approach B is 2.0% a year less expensive
Answer: C
NEW QUESTION # 86
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 # 87
A company has an opportunity to invest in a positive net present value project, but the project would require debt finance that would push the company's gearing ever a limit imposed by a debt covenant on an existing loan.
Which THREE of the following actions could be taken by the company?
- A. The directors could proceed will the project because their primary duly is maximise shared older wealth, even if that conflicts with lenders' interest.
- B. The company could approach its existing Lenders to negotiate a relaxation of :he conditions imposed by the covenant.
- C. The project could proceed if the cash inflows from the project will enable some of the debt to be repaid before the end of the financial year and so the breach of covenant may never be detected
- D. The company could seek alternative sources of finding, such as a reduction in the annual dividend payment, to finance the project.
- E. The directors could meet with key shareholder to discuss whether they wish the project proceed despite the breach of the covenant
- F. The project could be foregone if it cannot be funded without breaching the covenant
Answer: B,D,F
NEW QUESTION # 88
A company gas a large cash balance but its directors have been unable to identify any positive NPV projects to invest in. Which THREE of the following are advantages of a share repurchase, compared with a one-off large dividend?
- A. It will not create an expectation for future increased dividends.
- B. The shareholder can choose whether to take the cast or not.
- C. It means that the company will be able to pay lower total dividends in the future.
- D. It returns cash to shareholders so that they can choose hew to spend It
- E. It increases the number of shares issue.
Answer: A,B,D
NEW QUESTION # 89
The Board of Directors of a small listed company engaged in exploration are currently considering the future dividend policy of the company. Exploration is considered a high-risk business and consequently the company has a low level of debt finance.
Forecasts indicate a period of profit fluctuation in the next few years as the company is planning to embark on a major capital investment project. Debt finance is unlikely to be available due to the project's high business risk.
Which THREE of the following are practical considerations when determining the company's dividend/retention policy?
- A. The timing and size of the cash flow requirements for the new investment.
- B. The legislation and regulation governing distributable profits.
- C. The dividend policies of mature listed multinational companies in the exploration industry.
- D. The fluctuating nature of the projected future profits.
- E. The general level of interest rates and the tax savings on interest costs relating to debt finance.
Answer: A,B,D
Explanation:
Explanation
Discursive_F0
NEW QUESTION # 90
Company AD is planning to acquire Company DC. It is evaluating two methods of structuring the terms of the bid, which will be ether a debt-funded cash offer or a share exchange The following Information is relevant
* The two companies are of similar size and in related industries
* AB's gearing ratio measured as debt to debt plus equity, is currently 30% based on market values. This Is the company's optimum capital structure set to reflect the risk appetite of shareholders.
* The combined company is expected to generate savings and synergies
Which THREE of the following are advantages to AB's shareholders of a debt-funded cash offer compared with a share exchange?
- A. EPS Mil Increase
- B. WACC will increase f credit worthless falls too low, further increasing the returns to shareholders.
- C. Gearing will increase.
- D. Shareholder control will remain with AB's current shareholders
- E. More of the synergistic benefits of the acquisition will accrue to AB's current shareholders.
Answer: A,D,E
NEW QUESTION # 91
B has a S3 million loan outstanding on which the interested rate is reset every 6 months for the following 6 month and the interested is payable at the end of that 6 month period. The next 6 monthly reset period starts in 3 months and the treasurer of B thinks interested rates are likely to raise between and then.
Current 6-month rates are 6.4% and the treasurer can get a rate of 6.9% for a 6-month forward rate agreement (FRA) starting in 3 months time. By transacting an TRA the treasurer can lock in a rate today of 6.9%.
If interested rates are 7.5% in 3 months' time, what will the net amount payable be?
Give your answer to the nearest thousand dollars.
- A. 0
- B. 1
Answer: A
Explanation:
NEW QUESTION # 92
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. 0%
- B. 50%
- C. 8%
- D. 6%
Answer: A
NEW QUESTION # 93
A company is planning to issue a 5 year $100 million bond at a fixed rate of 6%.
It is also considering whether or not to enter into a 10 year $100 million swap to receive 5% fixed and pay Libor + 1% once a year.
The company predicts that Libor will be 4% over the life of the 5 years.
What is the impact of the swap on the company's annual interest cost assuming that the Libor prediction is correct?
- A. Fall by 2%.
- B. Increase by 1%.
- C. Fall by 1%.
- D. Remain the same.
Answer: D
NEW QUESTION # 94
Company A is unlisted and all-equity financed. It is trying to estimate its cost of equity.
The following information relates to another company, Company B, which operates in the same industry as Company A and has similar business risk:
Equity beta = 1.6
Debt:equity ratio 40:60
The rate of corporate income tax is 20%.
The expected premium on the market portfolio is 7% and the risk-free rate is 5%.
What is the estimated cost of equity for Company A?
Give your answer to one decimal place.
Answer:
Explanation:
? %
12.3, 12.30
NEW QUESTION # 95
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
Answer:
Explanation:
8, 8000000
NEW QUESTION # 96
Select the most appropriate divided for each of the following statements:
Answer:
Explanation:
NEW QUESTION # 97
Two unlisted companies TTT and YYY are being valued. The companies have similar capital structures and risk profiles and operate in the same industry sector It is easier to value TTT than to value YYY because there have recently been several well-publicised private sales of TTT shares.
Relevant company data:
What is the best estimate of YYY's share price?
- A. $0.60
- B. $0.94
- C. $0.68
- D. $1.20
Answer: D
NEW QUESTION # 98
Company P is a large unlisted food-processing company.
Its current profit before interest and taxation is $4 million, which it expects to be maintainable in the future.
It has a $10 million long-term loan on which it pays interest of 10%.
Corporate tax is paid at the rate of 20%.
The following information on P/E multiples is available:
Which of the following is the best indication of the equity value of Company P?
- A. $48 million
- B. $80 million
- C. $40 million
- D. $24 million
Answer: D
NEW QUESTION # 99
Which of the following statements are true with regard to interest rate swaps?
Select ALL that apply.
- A. An nicest rate swap is an internal hedging technique.
- B. Some companies interest rate swap to deliberately increase their risks because they believe that they are better at predicting future interest rates than the market.
- C. When interest rates are falling the risk of default by the fixed interest rate payer is low.
- D. An interest rate swap is an external hedging technique.
- E. Risk of default is high from the floating interest rate payer if interest rates rise.
Answer: C,D,E
NEW QUESTION # 100
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