2026 CIMAPRA19-F03-1 exam torrent CIMAPRA19-F03-1 Study Guide
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NEW QUESTION # 236
A profit-seeking company intends to acquire another company for a variety of reasons, primarily to enhance shareholder wealth.
Which THREE of the following offer the greatest potential for enhancing shareholder wealth?
- A. Achieving greater cultural diversity.
- B. Creating new opportunities for employees.
- C. Achieving more press coverage for the company.
- D. Exploiting production synergies.
- E. Elimination of existing competition.
- F. Acquiring Intellectual Property assets.
Answer: D,E,F
Explanation:
CIMA F3 clearly states that acquisitions enhance shareholder wealth only if they create real economic value, not just strategic or reputational benefits.
A). Press coverage - #
Media exposure does not directly generate cash flows or economic value.
B). New opportunities for employees - #
While beneficial socially, this does not directly enhance shareholder wealth unless it improves profitability.
C). Cultural diversity - #
CIMA F3 treats this as a soft benefit with no guaranteed financial return.
D). Acquiring Intellectual Property - #
IP can generate monopoly power, licensing income, and sustainable competitive advantage, directly increasing future cash flows.
E). Exploiting production synergies - #
Cost savings and operational efficiencies are a primary source of acquisition value highlighted throughout the F3 syllabus.
F). Elimination of competition - #
Reduced competition can increase pricing power and market share, improving long-term profitability and shareholder value.
NEW QUESTION # 237
F Co. is a large private company, the founder holds 60% of the company's share capital and her 2 children each hold 20% of the share capital.
The company requires a large amount of long-term finance to pursue expansion opportunities, the finance is required within the next 3 months. The family has agreed that an Initial Public Offering (IPO) should not be pursued at this time, because it would take up to 12 months to arrange.
The existing shareholders are currently considering raising the required finance from an established Venture Capitalist in the form of debt and equity. The Venture Capitalist has agreed to provide the required finance provided it can earn a return on investment of 25% per year. In addition, the Venture Capitalist requires 60% of the equity capital, a directorship in the company and a veto on all expenditure of a capital or revenue nature above a specified limit.
From the perspective of the family, which of the following are advantages of raising the required finance from the Venture Capitalist?
Select all that apply.
- A. The experience of the Venture Capitalist with growing businesses.
- B. The veto on expenditure above a specified level of a revenue or capital nature.
- C. The cost of the finance under the Venture Capital investment.
- D. The changes in shareholding as a result of the Venture Capital investment.
- E. The speed with which the finance can be obtained.
Answer: B,C
NEW QUESTION # 238
A company's current profit before interest and taxation is $1.1 million and it is expected to remain constant for the foreseeable future.
The company has 4 million shares in issue on which the earnings yield is currently 10%. It also has a $2 million bond in issue with a fixed interest rate of 5%.
The corporate income tax rate is 20% and is expected to remain unchanged.
Which of the following is the best estimate of the current share price?
- A. $1.10
- B. $2.50
- C. $2.00
- D. $2.75
Answer: C
NEW QUESTION # 239
The following information relates to Company ZZA's current capital structure:
Company ZZA is considering a change in the capital structure that will increase gearing to 35:65 (Debt Equity).
The risk-free rate is 4% and the return on the market portfolio is expected to be 12%.
The rate of corporate tax is 25%
Using the Capital Asset Pricing Model, calculate the cost of equity resulting from the proposed change to the capital structure.
- A. 15 36%
- B. 1103%
- C. 14 24%
- D. 12 08%
Answer: B
NEW QUESTION # 240
Select the category of risk for each of the descriptions below:
Answer:
Explanation:
NEW QUESTION # 241
A company generates and distributes electricity and gas to households and businesses.
Forecast results for the next financial year are as follows:
The Industry Regulator has announced a new price cap of $2.00 per Kilowatt.
The company expects this to cause consumption to rise by 15% but costs would remained unaltered.
The price cap is expected to cause the company's net profit to fall to:
- A. $8.75 million profit
- B. $43.00 million profit
- C. $126.50 million loss
- D. $164.00 million profit
Answer: D
Explanation:
Current:
Revenue = $450m at $2.50/kWh # units = 450 / 2.5 = 180m kWh
Costs = $250m # Profit = $200m
After cap: price = $2.00, demand up 15%:
New volume = 180 × 1.15 = 207m kWh
New revenue = 207 × 2.00 = $414m
Costs unchanged = $250m # New profit = 414 # 250 = $164m
NEW QUESTION # 242
A company has in a 5% corporate bond in issue on which there are two loan covenants.
* Interest cover must not fall below 3 times
* Retained earnings for the year must not fall below $3.5 million
The Company has 200 million shares in issue.
The most recent dividend per share was $0.04.
The Company intends increasing dividends by 10% next year.
Financial projections for next year are as follows:
Advise the Board of Directors which of the following will be the status of compliance with the loan covenants next year?
- A. The company will be in breach of the covenant in respect of interest cover only.
- B. The company will be in compliance with both covenants.
- C. The company will breach the covenant in respect of retained earnings only.
- D. The company will be in breach of both covenants.
Answer: C
Explanation:
From the projections, the company's interest cover remains above the required 3 times, so that covenant is satisfied. However, after paying the increased dividend (10% rise in DPS), the retained earnings for the year fall below the required $3.5 million, so the company would breach only the retained earnings covenant.
NEW QUESTION # 243
The two founding directors of an unlisted geared company want to establish its value as they are intending to approach a venture capitalist for additional funding.
The funding will be used to invest in a major new project which has very high growth potential. The directors intend to sell 10% of the company to the venture capitalist They have prepared the following current valuation of the company using the divided valuation model:
The following information is relevant.
* $60,000 is the most recent dividend paid.
* 4% is the average dividend growth over the last few years.
* 10% is an estimate of the company's cost of equity using the CAPM model with the industry average asset beta Which THREE of the following are weaknesses of the valuation method used in these circumstances?
- A. It is not an appropriate valuation method for a small, 10% equity stake
- B. Future dividend growth is unlikely to reflect historical dividend growth.
- C. The industry average asset beta is not an appropriate beta to use in CAPM in this case.
- D. CAPM cannot be used to estimate the cost of equity of an unlisted company.
- E. The company is unlikely to achieve constant growth in dividends year-on-year.
Answer: B,C,E
Explanation:
A - Industry average asset beta: The company is geared, so the appropriate beta for use in CAPM is an equity beta (asset beta re-geared to the firm's capital structure). Using an asset beta directly will understate equity risk and therefore understate the cost of equity and overvalue the company.
B - Constant dividend growth unlikely: The Gordon growth (dividend valuation) model assumes a constant growth rate in dividends in perpetuity. Here, a major new high-growth project means growth is likely to be uneven (possibly high for a period then stabilising), so the constant-g assumption is weak.
C - Future vs historical growth: They have simply projected the historical 4% growth into the future, but with a "very high growth potential" project, future dividend growth is unlikely to match the historic rate. That makes the choice of g highly questionable.
D is not inherently a weakness - the model values total equity; a 10% stake is simply 10% of that value (before considering any minority discounts).
E is incorrect - CAPM can be used for unlisted companies by using proxy betas from comparable listed firms.
NEW QUESTION # 244
Company J is in negotiations to acquire Company K and believes it can turn around Company K's performance to match its own.
The following information is available for the two companies:
Select the maximum price for each share that Company J should place on Company K during negotiations.
- A. $2.0
- B. $1.7
- C. $3.0
- D. $3.2
Answer: C
NEW QUESTION # 245
The competition authorities are investigating the takeover of Company Z by a larger company, Company Y.
Both companies are food retailers.
The takeover terms involve using a part cash, part share exchange means of payment.
Company Z is resisting the bid, arguing that it undervalues its business, while lobbying extensively among politicians to sway public opinion against the bidder.
Which of the following actions by Company Y is most likely to persuade the competition authorities to approve the acquisition?
- A. Company Y guarantees to preserve employment at its cental distribution depot.
- B. Company Y undertakes to pass on any cost savings to customers.
- C. Company Y increases the cash element of its bid offer.
- D. Company Y agrees to dispose of specified outlets which geographically overlap those of Company Z.
Answer: D
Explanation:
Competition authorities focus primarily on market structure and competition, not on whether the bid is generous or on employment promises. Their concern is: Will this merger substantially lessen competition?
In food retailing, a key issue is local market concentration - for example, a single group owning too many supermarkets in particular towns or regions. A classic remedy is for the bidder to divest overlapping outlets so that effective competition remains.
B). Agreeing to dispose of specified outlets which overlap geographically directly addresses the competition authority's main concern and is the standard structural remedy used in practice.
A (more cash) is irrelevant to competition issues.
C (job guarantees) is mainly a political/employment concern, not an antitrust one.
D (promise to pass on cost savings) is difficult to monitor and enforce and is normally viewed as less credible than structural remedies.
So the action most likely to persuade the competition authorities is B.
NEW QUESTION # 246
A company has:
* A price/earnings (P/E) ratio of 10.
* Earnings of $10 million.
* A market equity value of $100 million.
The directors forecast that the company's P/E ratio will fall to 8 and earnings fall to $9 million.
Which of the following calculations gives the best estimate of new company equity value in $ million following such a change?
- A.
- B.
- C.
- D.
Answer: C
NEW QUESTION # 247
A listed company is planning a share repurchase.
The following data applies
* There are 20 million shares in issue
* The share repurchase will involve buying back 10% of the shares at a price of $1.20
* The company is holding $4.8 million cash
* Earnings for the current year ended are $3.6 million
The Directors are concerned about the impact that this repurchase programme will have on the company's cash balance and current year earnings per share (EPS) ratio.
Advise the directors which of the following statements is correct?
- A. The cash balance will decrease by 10% and the EPS will decrease by 11%.
- B. The cash balance will decrease by 10% and the EPS will increase by 11%.
- C. The cash balance will decrease by 50% and EPS will decrease by11%
- D. The cash balance will decrease by 50% and EPS will increase by 11%
Answer: D
Explanation:
Shares repurchased: 10% × 20m = 2m shares at $1.20 # cash outflow = $2.4m.
Cash balance falls from $4.8m to $2.4m # 50% decrease.
EPS before: 3.6m / 20m = $0.18
EPS after: 3.6m / 18m = $0.20
% change in EPS = (0.20 # 0.18) / 0.18 # 11% increase.
So the correct statement is D: cash decreases by 50% and EPS increases by 11%.
NEW QUESTION # 248
A company has a financial objective of maintaining a gearing ratio of between 30% and 40%, where gearing is defined as debt/equity at market values.
The company has been affected by a recent economic downturn leading to a shortage of liquidity and a fall in the share price during 20X1.
On 31 December 20X1 the company was funded by:
* Share capital of 4 million $1 shares trading at $4.0 per share.
* Debt of $7 million floating rate borrowings.
The directors plan to raise $2 million additional borrowings in order to improve liquidity.
They expect this to reassure investors about the company's liquidity position and result in a rise in the share price to $4.2 per share.
Is the planned increase in borrowings expected to help the company meet its gearing objective?
- A. No, gearing would increase and the gearing objective would be exceeded both before and after the announcement.
- B. Yes, gearing would fall and the gearing objective would be exceeded before the announcement but met after the announcement.
- C. No, gearing would increase and the gearing objective would be met before the announcement but exceeded after the announcement.
- D. No, gearing would increase but the gearing objective would be met both before and after the announcement.
Answer: A
NEW QUESTION # 249
The Government of Eastland is concerned that competition within its private healthcare industry is being distorted by the dominant position of the market leader, Delta Care. The Government has instructed the industry regulator to investigate whether the industry is operating fairly in the interests of patients.
Which of the following factors might the industry regulator review as part of their investigation?
Select ALL that apply.
- A. Profits amongst healthcare providers
- B. Prices across the industry
- C. Industry entry barriers
- D. Each healthcare provider's market share
- E. Medical treatment efficacy rates
Answer: A,D,E
NEW QUESTION # 250
A company which is forecast to experience a strong growth in its profitability is evaluating a potential bond issue.
Which of the following changes in corporate income tax and in bond yields would make the bond issue more attractive to the company?
- A. A decrease in corporate tax and a decrease in bond yields.
- B. A decrease in corporate tax and an increase in bond yields.
- C. An increase in corporate tax and an increase in bond yields.
- D. An increase in corporate tax and a decrease in bond yields.
Answer: B
NEW QUESTION # 251
A company has a financial objective of maintaining a gearing ratio of between 30% and 40%, where gearing is defined as debt/equity at market values.
The company has been affected by a recent economic downturn leading to a shortage of liquidity and a fall in the share price during 20X1.
On 31 December 20X1 the company was funded by:
* Share capital of 4 million $1 shares trading at $4.0 per share.
* Debt of $7 million floating rate borrowings.
The directors plan to raise $2 million additional borrowings in order to improve liquidity.
They expect this to reassure investors about the company's liquidity position and result in a rise in the share price to $4.2 per share.
Is the planned increase in borrowings expected to help the company meet its gearing objective?
- A. No, gearing would increase and the gearing objective would be exceeded both before and after the announcement.
- B. Yes, gearing would fall and the gearing objective would be exceeded before the announcement but met after the announcement.
- C. No, gearing would increase and the gearing objective would be met before the announcement but exceeded after the announcement.
- D. No, gearing would increase but the gearing objective would be met both before and after the announcement.
Answer: A
Explanation:
Before announcement:
Equity = 4m shares × $4.0 = $16m
Debt = $7m
Gearing = 7 / 16 = 43.75% # already above 40%.
After additional $2m debt and higher share price:
Debt = 7 + 2 = $9m
Equity = 4m × $4.2 = $16.8m
Gearing = 9 / 16.8 # 53.6% # even further above the 40% ceiling.
So the gearing objective is exceeded both before and after, and gearing rises.
NEW QUESTION # 252
A company is concerned about the interest rate that it will be required to pay on a planned bond issue.
It is considering issuing bonds with warrants attached.
Advise the directors which of the following statements about warrants is NOT correct?
- A. Warrants can potentially be very expensive because they can involve the issue of shares at a discount in the future if exercised.
- B. Warrants give the holder the right to buy ordinary shares in the company at a fixed price at a future date.
- C. Warrants can be sold back to the issuing company for the nominal value of the share if no longer required by the bond holder.
- D. Warrants are a debt sweetener attached to the bond to drive down the interest rate payable on the bond.
Answer: C
Explanation:
Comprehensive and Detailed Step by Step Explanation with all CIMA F3: Financial Strategy documents: = CIMA F3 explains warrants as equity-linked sweeteners often attached to debt issues (such as bonds) to make them more attractive, allowing the issuer to reduce the coupon rate. This aligns directly with statement A, which is therefore correct: warrants are indeed used to "sweeten" a bond and drive down the interest rate.
Statement B is also correct: a warrant gives the holder the right, but not the obligation, to subscribe for a company's ordinary shares at a fixed exercise price on or before a specified future date. This is a core definition in the F3 syllabus under hybrid and derivative instruments.
Statement D reflects the idea that warrants can be costly to existing shareholders. If the share price in future is well above the exercise price, new shares will be issued at what is effectively a discount, diluting existing shareholders' value. This is a recognised downside in CIMA discussions of equity-linked incentives.
Statement C is the incorrect one. Warrants are typically detachable and tradeable, but they are not normally redeemable by the issuer at nominal share value at the discretion of the holder. They're exercised into shares or sold in the market, not "sold back" to the company for par. Hence C is NOT correct.
Questions no: 199044
NEW QUESTION # 253
Extracts from a company's profit forecast for the next financial year as follows:
Since preparing the forecast, the company has decided to return surplus cash to shareholders by a share repurchase arrangement.
The share repurchase would result in the company purchasing 20% of the 1,250 million ordinary shares currently in issue and canceling them.
Assuming the share repurchase went ahead, the impact on the company's forecast earnings per share will be an increase of:
- A. $0.200
- B. $0.125
- C. $0.175
- D. $0.100
Answer: D
Explanation:
Earnings attributable to ordinary shareholders = profit after preference dividend = $500m.
Current number of shares = 1,250m.
Current EPS = 500 / 1,250 = $0.40 per share.
Share repurchase: 20% of 1,250m = 250m shares bought back and cancelled.
New number of shares = 1,250m # 250m = 1,000m shares.
Assuming profit is unchanged:
New EPS = 500 / 1,000 = $0.50 per share.
Increase in EPS = 0.50 # 0.40 = $0.10 # $0.100.
NEW QUESTION # 254
Company J is in negotiations to acquire Company K and believes it can turn around Company K's performance to match its own.
The following information is available for the two companies:
Select the maximum price for each share that Company J should place on Company K during negotiations.
- A. $2.0
- B. $1.7
- C. $3.0
- D. $3.2
Answer: C
NEW QUESTION # 255
Which THREE of the following statements are disadvantages of the net asset basis of valuation?
- A. The net book value of assets is merely a record of past transactions which complies with accounting conventions
- B. The net book value of current assets is normally a reliable indicator of their realisable value
- C. The net realisable value is usually different from the net book value shown in the financial statements
- D. The net book value of assets can be obtained from the financial statements
- E. Intangible assets are often not shown in the company's financial statements.
Answer: A,C,E
Explanation:
Disadvantages of net asset basis:
B - Net book value is historic cost based and reflects accounting conventions, not current value.
D - Net realisable value is usually different from NBV, so NBV may misstate value.
E - Many intangible assets (brands, goodwill, know-how) are missing from the balance sheet, so value is understated.
Answer (Q116): B, D, E
NEW QUESTION # 256
STU 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?
- A. STU accounts for its intangible assets at net realisable value.
- B. STU accounts for its intangible assets at historical value.
- C. STU does not account for its intangible assets.
- D. STU does not account for its tangible assets
Answer: C
Explanation:
STU's value is mainly in its people (human capital) and has few tangible assets. Net asset valuation relies on balance sheet assets, but internally generated intangibles like human capital are not recognised under normal accounting rules. So the accounts understate the real value of the business.
NEW QUESTION # 257
A company is undertaking a lease-or-buy evaluation, using the post-tax cost of bank borrowing as the discount rate.
Details of the two alternatives are as follows:
Buy option:
* To be financed by a bank loan
* Tax depreciation allowances are available on a reducing-balance basis
* Assets depreciated on a straight-line basis
Lease option:
* Finance lease
* Maintenance to be paid by the lessee
* Tax relief available on interest payments and book depreciation
Which THREE of the following are relevant cashflows in the lease-or-buy appraisal?
- A. Bank loan payments
- B. Tax relief on tax depreciation allowances
- C. Lease payments
- D. Maintenance payments
- E. Tax relief on the book depreciation
Answer: B,C,E
Explanation:
Relevant cash flows for a lease-or-buy decision (discounting at post-tax cost of borrowing) are:
A). Tax relief on tax depreciation allowances - relevant for the buy option.
B). Bank loan payments - not relevant; financing flows are excluded when using the borrowing rate as discount rate.
C). Maintenance payments - here, maintenance is paid by the lessee under the lease, and would also be paid if the asset is bought; since it is the same under both options, it is not a differential cash flow.
D). Lease payments - relevant cash outflows under the lease option.
E). Tax relief on the book depreciation - relevant where tax relief is given on book depreciation (here, under the finance lease).
Therefore, the three relevant cash flows from the list are:
Answer (200259):
A, D, E\boxed{A,\ D,\ E}A, D, E
NEW QUESTION # 258
A company needs to raise $40 million to finance a project. It has decided on a right 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 $10.00 per share.
- A. 1 new share for every 4 existing shares
- B. 1 new share for every 25 existing shares
- C. 1 new share for every 20 existing shares
- D. 1 new share for every 5 existing shares
Answer: A
Explanation:
The company needs to raise $40 million via a rights issue.
Current share price = $10
Rights issue at a 20% discount, so issue price =
10×(1#0.20)=10×0.8=$810 \times (1 - 0.20) = 10 \times 0.8 = \$810×(1#0.20)=10×0.8=$8 Number of new shares needed:
New shares=40m8=5 million shares\text{New shares} = \frac{40\text{m}}{8} = 5\text{ million shares} New shares=840m=5 million shares There are currently 20 million shares in issue, so the rights issue ratio is:
New sharesExisting shares=520=14\frac{\text{New shares}}{\text{Existing shares}} = \frac{5}{20} = \frac
{1}{4}Existing sharesNew shares=205=41
So, shareholders will receive 1 new share for every 4 existing shares.
NEW QUESTION # 259
Company H is considering the valuation of an unlisted company which it hopes to acquire.
It has obtained the target company's financial statements.
Company H has been advised that the book value of net assets as shown in the financial statements of the target company does not provide a reliable indicator of their true value.
Advise the Board of Directors which of the following THREE statements are disadvantages of the net asset basis of valuation?
- A. The net book value of assets can be obtained from the financial statements.
- B. The net realisable value is usually different from the net book value shown in the financial statements.
- C. The net book value of current assets is normally a reliable indicator of their realisable value.
- D. The net book value of assets is merely a record of past transactions which complies with accounting conventions.
- E. Intangible assets are often not shown in the company's financial statements.
Answer: B,D,E
Explanation:
A). Net book value (NBV) is based on historical cost and accounting conventions # it often doesn't reflect current economic value. This is a disadvantage.
C). Many intangibles (brands, know-how, human capital, internally generated IP) are not recognised on the balance sheet, so a net asset valuation can seriously understate value # disadvantage.
D). Net realisable value (what assets could actually be sold for) is usually different from NBV, again showing NBV is a poor proxy for real value # disadvantage.
B). "Can be obtained from the financial statements" - that's an advantage (it's easy and cheap).
E). NBV of current assets is often reasonably close to realisable value (especially cash, receivables less bad debts, short-term inventory), so that's not a disadvantage.
So the three disadvantages are A, C and D.
NEW QUESTION # 260
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