Latest CIMAPRA19-F03-1 Actual Free Exam Questions Updated 435 Questions

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CIMA CIMAPRA19-F03-1 (F3 Financial Strategy) Certification Exam is an essential requirement for individuals who want to become certified members of the Chartered Institute of Management Accountants (CIMA). CIMAPRA19-F03-1 exam covers a wide range of topics related to financial strategy development and implementation, including financial risk management. CIMAPRA19-F03-1 exam is a computer-based test that consists of objective-type questions and is divided into two sections. CIMAPRA19-F03-1 exam is designed to assess the candidate's knowledge and understanding of financial strategy development and implementation.

CIMA CIMAPRA19-F03-1 is a highly esteemed financial certification offered by the Chartered Institute of Management Accountants (CIMA). F3 Financial Strategy certification is globally recognized and is highly valued in the financial industry. CIMAPRA19-F03-1 exam is designed to test the candidate's ability to analyze, evaluate and implement financial strategies in various business scenarios.

 

NEW QUESTION # 133
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. The method of finance chosen will not affect the post-acquisition earning per share of the combined business
• B. 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
• C. Company A's gearing will increase following a share exchange.
• D. Company A's weighted average cost of capital will fall if financing is with debt
• E. Company B's shareholders will be able to participate in the future growth of the combined business if it is a share exchange

Answer: B,D

NEW QUESTION # 134
Which TWO of the following statements about debt instruments are correct?

• A. If corporation tax rates rise, the tax shield effect on debenture interest will be reduced.
• B. A zero coupon will eliminate the tax shield effect on debt payments.
• C. The true cost of servicing debt instruments to the company is the post-tax cost of debt.
• D. Changes in corporation tax rates will have no effect on the tax shield of fixed rate debentures.

Answer: B,D

Explanation:
CIMA F3 links the cost of debt to the tax shield created by the tax deductibility of interest. The effective cost of servicing debt to a company is therefore the post-tax cost of debt, commonly expressed as kd(1#T)k_d(1-T) kd(1#T). This makes statement C correct: when evaluating financing decisions and WACC, the company benefits from interest tax relief, so the relevant servicing cost is after tax. Statement A is also treated as correct in the standard F3 exam context: zero-coupon debt pays no periodic coupon interest, so there are no regular interest payments generating the conventional annual tax-deductible interest expense and therefore the familiar tax-shield effect on "interest payments" is not obtained in the same way (i.e., the typical coupon- based shield is eliminated). Statement B is incorrect because the size of the tax shield depends on the tax rate; if corporation tax changes, the value of the tax relief changes. Statement D is incorrect because if corporation tax rates rise, the tax shield from deductible interest would increase, not reduce (a higher tax rate increases the tax saving per dollar of interest). Hence the two correct statements are A and C.

NEW QUESTION # 135
A company is considering taking out $10.000,000 of floating rate bank borrowings to finance a new project.
The current rate available to the company on floating rate barrowings is 8%. The borrowings contain a covenant based on an interested cover of 5 times.
The project is expected to generate the following results:

At what interest rate on the floating rate borrowings is the bank covenant first breached?

• A. 9.4%
• B. 11.0%
• C. 8.0%
• D. 10.0%

Answer: B

NEW QUESTION # 136
NNN is a company financed by both equity and debt. The directors of NNN wish to calculate a valuation of the company's equity and at a recent board meeting discussed various methods of business valuation.
Which THREE of the following are appropriate methods for the directors of NNN to use in this instance?

• A. Cash flow to all investors discounted at WACC.
• B. Cash flow to equity discounted at the cost of equity less the value of debt.
• C. Cash flow to equity discounted at the cost of equity.
• D. Total earnings multiplied by a suitable price-earnings ratio.
• E. Cash flow to all investors discounted at WACC less the value of debt.

Answer: C,D,E

Explanation:
NNN is financed by both equity and debt, and the directors specifically want the value of the equity. Valid approaches are:
A). Total earnings × P/E ratio - Correct
Using a suitable sector or market price-earnings multiple and multiplying by NNN's earnings gives an estimate of the equity value directly.
B). Cash flow to all investors discounted at WACC less the value of debt - Correct Discounting free cash flow to the firm (to all investors) at the WACC gives the enterprise value (debt + equity). Subtracting the market value of debt then leaves an estimate of the equity value.
C). Cash flow to all investors discounted at WACC - Not sufficient
This gives the total firm value, not just the equity. On its own, it doesn't answer the question.
D). Cash flow to equity discounted at the cost of equity less the value of debt - Incorrect Discounting cash flow to equity at the cost of equity already produces equity value. Subtracting debt again would be conceptually wrong (double counting).
E). Cash flow to equity discounted at the cost of equity - Correct
This is the standard free cash flow to equity (FCFE) valuation method and directly yields the value of equity.
So the appropriate methods here are A, B and E.

NEW QUESTION # 137
Select the most appropriate divided for each of the following statements:

Answer:

Explanation:

NEW QUESTION # 138
Which TWO of the following situations offer arbitrage opportunities?
A)

B)

C)

D)

• A. Option C
• B. Option A
• C. Option D
• D. Option B

Answer: D

NEW QUESTION # 139
A company's gearing (measured as debt/(debt + equity)) is currently 60% and it is investigating whether an optimal gearing structure exists within the industry.
It has analysed the capital structure of similar companies in the industry and it would appear that there is evidence supporting the traditional theory of capital structure.
Companies with the lowest WACC in the industry have gearing of around 45% to 50%.
Which of the following actions would result in the company achieving a more optimal capital structure?

• A. Refinancing to replace some of its short term debt with long term debt.
• B. Using retained cash to undertake a buyback of some of its equity.
• C. Increasing the level of dividend to return more cash to shareholders.
• D. Undertaking a rights issue of equity to repay some of its debt.

Answer: D

Explanation:
Gearing is measured as Debt / (Debt + Equity). The company is currently at 60% gearing, but the evidence from comparable companies (traditional theory of capital structure) suggests the optimal WACC occurs around 45-50% gearing.
To move down from 60% to about 45-50%, the company must reduce the proportion of debt in its capital structure and/or increase equity.
A: Rights issue to repay debt # equity #, debt # # gearing falls # moves toward optimal range # B: Replace short-term with long-term debt # total debt unchanged # gearing unchanged # C: Increase dividends # equity (retained earnings) #, debt unchanged # gearing rises # D: Share buyback using cash # equity #, debt unchanged # gearing rises # So only A achieves a more optimal (lower) gearing level.

NEW QUESTION # 140
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 book value of assets is merely a record of past transactions which complies with accounting conventions.
• C. Intangible assets are often not shown in the company's financial statements.
• D. The net book value of current assets is normally a reliable indicator of their realisable value.
• E. The net realisable value is usually different from the net book value shown in the financial statements.

Answer: B,C,E

NEW QUESTION # 141
RR has agreed to sell goods to XX for S20.000 XX will pay when the goods are delivered in 6 months time.
RR's home currency is the £- The current exchange rate is 4.3 £/S. The projected inflation rate for the S is
2.8%, and for the E 4 6%.
When RR receives payment for its goods, what will the value be to the nearest pound?

• A. £85,243
• B. £84.520
• C. £87.506
• D. £86 760

Answer: D

Explanation:
Current rate: 4.3 £/S
Inflation (annual): S = 2.8%, £ = 4.6%.
Approximate 6-month inflation:
S: 1.4%
£: 2.3%
Forward rate (6 months):
F#4.3×1.0231.014#4.3387 £/SF \approx 4.3 \times \frac{1.023}{1.014} \approx 4.3387\ \text{£/S}F#4.3×1.
0141.023#4.3387 £/S
Payment: 20,000 S
£ value#20,000×4.3387#86,774\text{£ value} \approx 20{,}000 \times 4.3387 \approx 86{,}774£ value#20,
000×4.3387#86,774
Nearest option: £86,760
Correct answer: C. £86,760

NEW QUESTION # 142
A company's dividend policy is to pay out 50% of its earnings.
Its most recent earnings per share was $0.50, and it has just paid a dividend per share of $0.25.
Currently, dividends are forecast to grow at 2% each year in perpetuity and the cost of equity is 10.5%.
In order to grow its earnings and dividends, the company is considering undertaking a new investment funded entirely by debt finance. If the investment is undertaken:
* Its cost of equity will immediately increase to 12% due to the increased finance risk.
* Its earnings and dividends will immediately commence growing at 4% each year in perpetuity.
Which of the following is the expected percentage change in the share price if the new investment is undertaken?

• A. Increase = 10.5%
• B. Increase = 8.3%
• C. Decrease = 7.7%
• D. Increase = 2%

Answer: B

NEW QUESTION # 143
HHH Company has a fixed rate loan at 10.0%, but wishes to swap to variable. It can borrow at the risk-free rate +8%. The bank is currently quoting swap rates of 3.1% (bid) and 3.5% (ask). What net rate will HHH Company pay if it enters into the swap?

• A. Risk-free rate +6.9%
• B. Risk-free rate+3.1%
• C. Risk-free rate +8%
• D. Risk-free rate +6.5%

Answer: B

NEW QUESTION # 144
WW is a quoted manufacturing company. The Finance Director has addressed the shareholders during WW's annual general meeting-She has told the shareholders that WW raised equity during the year and used the funds to repay a large loan that was maturing, thereby reducing WW's gearing ratio At the conclusion of the Finance Director's speech one of the shareholders complained that it had been foolish for WW to have used equity to repay debt The shareholder argued that the Modigliani and Miller model (with tax) offers proof that debt is cheaper than equity when companies pay tax on their profits.
Which THREE arguments could the Finance Director have used in response to the shareholder?

• A. Reducing the gearing ratio has reduced the financial risk of WW which will benefit shareholders
• B. A lower gearing ratio will result in an increase in the value of the company
• C. The shareholder was confusing the cost of capital with shareholder wealth
• D. The Modigliani and Miller model would only be valid in practice if WW's shareholders were aware of the model and believed in its validity
• E. WW was approaching a debt covenant limit and it was therefore important to reduce gearing.
• F. A lower gearing ratio creates greater flexibility for WW in the future

Answer: A,B,E

NEW QUESTION # 145
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. Using cash flows to equity rather than expected dividends as the initial cash flows.
• B. Including retained earnings from the Statement of Financial Position.
• C. Using the company's weighted average cost of capital to discount cash flows attributable to shareholders.
• D. Deducting replacement capital expenditure
• E. Deducting $400 million for the value of the company's corporate bond.

Answer: B,C,D

NEW QUESTION # 146
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. 35, 35, 34000000, 35000000
• B. 34, 35, 34000000, 35000000

Answer: B

NEW QUESTION # 147
The directors of a multinational group have decided to sell off a loss-making subsidiary and are considering the following methods of divestment:
1. Trade sale to an external buyer
2. A management buyout (MBO)
The MBO team and the external buyer have both offered the same price to the parent company for the subsidiary.
Which of the following is an advantage to the parent company of opting for a MBO compared to a trade sale as the preferred method of divestment?

• A. Avoid a hostile reaction from key management.
• B. Raise the cash more quickly.
• C. Focus on the core competencies of the business
• D. Retain the know edge of key management.

Answer: A

Explanation:
The parent wants to sell a loss-making subsidiary, with two options:
Trade sale to an external buyer
Management Buyout (MBO) - where the subsidiary's existing management team buys it.
Both offer the same price, so we compare non-price factors.
With an MBO:
The existing management are the buyers. So instead of fearing job losses or big changes, they benefit directly.
That makes them supportive, not hostile.
Therefore, the parent company is more likely to avoid a hostile reaction from key management - this is a clear advantage of choosing an MBO over a trade sale.
Why not the others?
A). Raise the cash more quickly - MBOs often need complex financing (private equity, bank debt), which can actually slow things down versus a straightforward trade sale.
C). Focus on core competencies - that's a benefit of divesting in general, not specific to MBO vs trade sale.
D). Retain the knowledge of key management - in an MBO, management usually leave with the business, so the parent loses their knowledge, not retains it.

NEW QUESTION # 148
Listed Company A has prepared a valuation of an unlisted company. Company B. to achieve vertical integration Company A is intending to acquire a controlling interest in the equity of Company B and therefore wants to value only the equity of Company B.
The assistant accountant of Company A has prepared the following valuation of Company B's equity using the dividend valuation model (DVM):
Where:
* S2 million is Company B's most recent dividend
* 5% is Company B's average dividend growth rate over the last 5 years
* 10% is a cost of equity calculated using the capital asset pricing model (CAPM), based on the industry average beta factor

Which THREE of the following are valid criticisms of the valuation of Company B's equity prepared by the assistant accountant?

• A. The beta factor used may not reflect Company B's financial risk.
• B. The 5% growth rate may not reflect the future growth of Company B.
• C. It is better to use the present value of earnings rather than present value of dividends to value a controlling interest
• D. The DVM calculation should use Company A's cost of equity rather than Company B's cost of equity
• E. An unlisted company cannot use the capital asset pricing model to calculate its cost of equity

Answer: A,B,C

Explanation:
B). Using present value of earnings (or free cash flows) is more appropriate when valuing a controlling interest, because the acquirer can change the dividend policy. #
C). A 5% historical dividend growth rate may not reflect future growth - assuming it will continue indefinitely is a big weakness. #
D). The industry average beta may not reflect Company B's specific financial (gearing) risk; it should ideally be adjusted to reflect B's capital structure. # The others:
A is incorrect - you should generally use the target's cost of equity (or project-specific) not Company A's.
E is incorrect - unlisted companies can use CAPM via proxy/industry betas.

NEW QUESTION # 149
A company has just received a hostile bid. Which of the following response strategies could be considered?

• A. Poison pill strategy
• B. Approach a White Knight
• C. Revalue non-current assets
• D. Change the Articles of Association to amend voting rights

Answer: B

Explanation:
In response to a hostile bid, one recognised defensive tactic is to seek a "white knight" - a friendlier alternative bidder whose terms may better protect existing management and shareholders. The other options are either pre-bid structural measures or not typical primary response strategies once a hostile bid has been received.

NEW QUESTION # 150
A company is considering hedging the interest rate risk on a 3-year floating rate borrowing linked to the 12-month risk-free rate.
If the 12-month risk-free rate for the next three years is 2%, 3% and 4%, which of the following alternatives would result in the lowest average finance cost for the company over the three years?

• A. Do not hedge.
• B. Enter into an interest rate cap at an annual premium of 0.533% and a cap of 3%,
• C. Enter into a zero-cost collar with a floor of 2.9% and a ceiling of 4%.
• D. Enter into an interest rate swap at 3.1% fixed against 12-month risk-free rate.

Answer: A

NEW QUESTION # 151
Company R is a well-established, unlisted, road freight company.
In recent years R has come under pressure to improve its customer service and has had some cusses in doing this However, the cost of improved service levels has resulted In it marketing small losses in its latest financial year. This is the forest time R has not been profitable.
R uses a' residual divided policy ad has paid dividends twice in the last 10 years.
Which of the following methods would be most appropriate for valuating R?

• A. The earnings yield method, adjusting the earnings yield of a listed company downloads to reflect R's unlisted status.
• B. Valuing the tangible assets and intangible assets of R.
• C. The P/E method, adjusting the P/E of a listed company downwards to reflect R's unlisted status.
• D. The divided valuation mode.

Answer: D

Explanation:
Most suitable valuation method for an unlisted company that has only recently made a (small) loss and has very irregular dividends is an earnings-based multiple using comparables, not a dividend model or pure asset valuation.

NEW QUESTION # 152
......

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