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CIMA F3 Financial Strategy Sample Questions (Q269-Q274):

NEW QUESTION # 269
Company A, a listed company, plans to acquire Company T, which is also listed.
Additional information is:
* Company A has 150 million shares in issue, with market price currently at $7.00 per share.
* Company T has 120 million shares in issue,. with market price currently at $6.00 each share.
* Synergies valued at $50 million are expected to arise from the acquisition.
* The terms of the offer will be 2 shares in A for 3 shares in T.
Assuming the offer is accepted and the synergies are realised, what should the post-acquisition price of each of Company A's shares be?
Give your answer to two decimal places.

A. 7.24
B. 8.24

Answer: B

Explanation:

NEW QUESTION # 270
Company AAB is located in Country A with the A$ as its functional currency It plans to grow by acquisition and has identified Company BBA as a potential takeover candidate Company BBA is located in Country B with the BS as its functional currency.
The directors of Company AAB are concerned about foreign currency risk if the acquisition goes ahead Which of the following will be most effective in reducing Company AAB's exposure to translation risk if the acquisition is successful1?

A. Financing the acquisition with borrowings in BS's
B. Financing the acquisition with equity in A$'s.
C. Setting up a mufti-currency bank account to net-off receipts and payments
D. Using forward contracts to fix the exchange rate between the AS and the B$

Answer: A

Explanation:
Translation risk arises when the foreign subsidiary's net assets (in BS) are translated into the parent's currency (A$). The most effective hedge is to match those net assets with liabilities in the same foreign currency. By financing the acquisition with BS borrowings, AAB creates a BS liability that offsets BBA's BS net assets, reducing the net exposure to translation movements.
A$: equity in A$ doesn't hedge BS assets.
Multi-currency bank accounts and forward contracts mainly address transaction risk, not long-term translation of balance sheet net assets.

NEW QUESTION # 271
Company GDD plans to acquire Company HGG, an unlisted company which has been in business for 3 years.
Company HGG has incurred losses in its first 3 years but is expected to become highly profitable in the near future There are no listed companies in the country operating in the same business field as Company HGG The future success of Company HGG's business and hence the future growth rate in earnings and dividends is difficult to determine Company GDD is assessing the validity of using the dividend growth method to value Company HGG Which THREE of the following are weaknesses of using the dividend growth model to value an unlisted company such as Company HGG?

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

Answer: B,C,E

NEW QUESTION # 272
Company A is planning to acquire Company B. Both companies are listed and are of similar size based on market capitalisation No approach has yet been made to Company B's shareholders as the directors of Company A are undecided about the most suitable method of financing the offer Two methods are under consideration a share exchange or a cash offer financed by debt.
Company A currently has a gearing ratio (debt to debt plus equity) of 30% based on market values. The average gearing ratio (debt to debt plus equity) for the industry is 50% Although no formal offer has been made there have been market rumours of the proposed bid. which is seen as favorable to Company A. As a consequence. Company As share price has risen over the past few weeks while Company B's share price has fallen.
Which THREE of the following statements are most likely to be correct?

A. Company B's shareholders will be able to participate in the future growth of the combined business if it is a share exchange
B. Company A's weighted average cost of capital will fall if financing is with debt
C. Company A's gearing will increase following a share exchange.
D. Based on current share price movements, a share exchange would mean Company A has to issue fewer shares to acquire Company B than it would have done a few weeks ago
E. The method of finance chosen will not affect the post-acquisition earning per share of the combined business

Answer: A,B,D

Explanation:
A and B similar market cap.
A's gearing (D / (D+E)) = 30% vs industry 50% # relatively under-geared.
Rumours of bid good for A (A share price up) and bad for B (B share price down).
Financing choices: share exchange or cash raised by new debt.
Assess statements:
A). A's price # and B's price #. For a given value per B share, fewer A shares are now needed than a few weeks ago # True.
B). With a share exchange, B's shareholders receive A's shares, so they share in future performance of combined entity # True.
C). Financing method does affect EPS (interest expense vs number of shares) # False.
D). Under MM with tax and given A is under-geared vs the 50% industry norm, adding debt is likely to lower WACC via the tax shield (ignoring distress costs) # Most likely true.
E). A share exchange issues equity, not debt; gearing effect is ambiguous and not necessarily an increase # Not "most likely".

NEW QUESTION # 273
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 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
B. The directors could proceed will the project because their primary duly is maximise shared older wealth, even if that conflicts with lenders' interest.
C. The project could be foregone if it cannot be funded without breaching the covenant
D. The company could approach its existing Lenders to negotiate a relaxation of :he conditions imposed by the covenant.
E. The directors could meet with key shareholder to discuss whether they wish the project proceed despite the breach of the covenant
F. The company could seek alternative sources of finding, such as a reduction in the annual dividend payment, to finance the project.

Answer: C,D,F

Explanation:
Acceptable actions:
Negotiate with lenders (A)
Drop the project if funding would breach the covenant (B)
Look for other finance such as cutting dividends (D)
Breaching covenants deliberately or relying on shareholders to "approve" a breach is not acceptable.

NEW QUESTION # 274
......

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CIMAPRA19-F03-1 Valid Exam Tutorial & New CIMAPRA19-F03-1 Test Cost

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CIMA F3 Financial Strategy Sample Questions (Q269-Q274):

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