[May 03, 2023] Get New F3 Practice Test Questions Answers
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NEW QUESTION 124
An all equity financed company reported earnings for the year ending 31 December 20X1 of $8 million.
One of its financial objectives is to increase earnings by 5% each year.
In the year ending 31 December 20X2 it financed a project by issuing a bond with a $1 million nominal value and a coupon rate of 4%.
The company pays corporate income tax at 20%.
If the company is to achieve its earnings target for the year ending 31 December 20X2, what is the minimum operating profit (profit before interest and tax) that it must achieve?
- A. $8.40 million
- B. $10.54 million
- C. $6.69 million
- D. $10.50 million
Answer: B
NEW QUESTION 125
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 126
A company plans to cut its dividend but is concerned that the share price will fall. This demonstrates the _____________ effect
- A. B
- B. A
Answer: B
NEW QUESTION 127
An entity prepares financial statements to 30 June.
During the year ended 30 June 20X2 the following events occurred:
1 July 20X1
* The entitiy borrowed $100 million at a variable rate of interest.
* In order to protect itself against the variability of its interest cashflows, the entity entered into a pay-fixed-receive-variable interest swap with annual settlements. The fair value of the swap on this date was zero.
30 June 20X2
* The entity received a net settlement of $2 million under the swap. After this net settlement, the fair value of the swap was $5 million - a financial asset.
The entity decides to use hedge accounting for this arrangement and has designated it as a cash flow hedge. The swap is a perfect hedge of the variability of the cash interest payments.
Which of the following describes the treatment of the settlement and the change in the fair value of the swap in the statement of profit or loss and other comprehensive income for the year ended 30 June 20X2?
- A. $7 million is recognised in other comprehensive income.
- B. $5 million is recognised in profit or loss and $2 million is recognised in other comprehensive income.
- C. $7 million is recognised in profit or loss.
- D. $2 million is recognised in profit or loss and $5 million is recognised in other comprehensive income.
Answer: D
NEW QUESTION 128
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. An unlisted company cannot use the capital asset pricing model to calculate its cost of equity
- B. The beta factor used may not reflect Company B's financial risk.
- C. The 5% growth rate may not reflect the future growth of Company B.
- D. The DVM calculation should use Company A's cost of equity rather than Company B's cost of equity
- E. It is better to use the present value of earnings rather than present value of dividends to value a controlling interest
Answer: B,C,D
NEW QUESTION 129
CI IJ has decided to move its production plant to overseas country X. This would make the product cheaper to produce. The technology used to make the product is very advanced and some of the skilled staff would have to move to country X.
The Production Director has identified that there are some political risks in moving to county X.
For each of the political risks of moving to country X shown below, select the correct method for reducing the risk.
Answer:
Explanation:
NEW QUESTION 130
Which of the following explains an aim of integrated reporting in accordance with The International <IR> Framework as issued by the International Integrated Reporting Council?
- A. To highlight the separation of strategy, governance and financial performance in a social, environmental and economic context.
- B. To integrate the various accepted accounting practices of member bodies into a single, unified code of accounting principles.
- C. To highlight the need for greater reporting of performance to stakeholders in a greater level of detail than at present.
- D. To support decision making and actions that focus on creating value over the short, medium and long term.
Answer: D
NEW QUESTION 131
A company is based in Country Y whose functional currency is YS. It has an investment in Country Z whose functional currency is ZS This year the company expects to generate ZS20 million profit after tax.
Tax Regime
* Corporate income tax rate in Country Y is 60%
* Corporate income tax rate in Country Z Is 30%
* Full double tax relief is available
Assume an exchange rate of YS1 = ZS5
What is the expected profit after tax in YS if the ZS profit is remitted to Country Y?
- A. YS2 29 million
- B. YS1 60 million
- C. YS57.14 million
- D. YS6.67 million
Answer: A
NEW QUESTION 132
A is a listed company. Its shares trade on a stock market exhibiting semi-strong form efficiency.
Which of the following is most likely to increase the wealth of A's shareholders?
- A. Announcing that a project will be undertaken generating a positive net present value.
- B. Announcing that a non-current asset will be revalued in the statement of financial position.
- C. Announcing that the final dividend will remain unchanged from the previous 3 years.
- D. Announcing that inventory will be impaired.
Answer: A
NEW QUESTION 133
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 = 8.3%
- B. Increase = 10.5%
- C. Increase = 2%
- D. Decrease = 7.7%
Answer: A
NEW QUESTION 134
AA is considering changing its capital structure. The following information is currently relevant to AA:
The gearing rating raising the new debt finance will be 50%.
Which THREE of the following statement about the impact of AA's change in capital structure are true under Modigliani and Miler's capital structure theory with tax.
- A. The cost of equity will increase above 10%
- B. The cost of debt will increase above 4%
- C. The WACC will decrease below 7.6%
- D. The WACC increase above 7.6
- E. The cost of debt remain unchanged at 4%
- F. The cost of equity will decrease below 10%
Answer: C,D,E
NEW QUESTION 135
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 speed with which the finance can be obtained.
- B. The cost of the finance under the Venture Capital investment.
- C. The experience of the Venture Capitalist with growing businesses.
- D. The veto on expenditure above a specified level of a revenue or capital nature.
- E. The changes in shareholding as a result of the Venture Capital investment.
Answer: B,D
NEW QUESTION 136
H Company has a fixed rate load at 10.0%, but wishes to swap to variable. It can borrow at LIBOR 8%.
The bank is currently quoting swap rates of 3.1% (bid) and 3.5% (ask).
What net rate will H Company pay if it enters into the swap?
- A. LIBOR +8%
- B. LIBOR +3.1%
- C. LIBOR +6.9%
- D. LIBOR +6.5%
Answer: C
NEW QUESTION 137
A company has forecast the following results for the next financial year:
The following is also relevant:
* Profit after tax for the year can be assumed to be equivalent to free cash flow for the year.
* Debt finance comprises a $10 million floating rate loan which currently carries an interest rate of 5%.
* $400,000 investment in non-current assets is required to achieve required growth, all of which is to financed from next year's free cash flow.
* The company plans to pay a dividend of $150,000 next year, financed from next year's free cash flow.
The company is concerned that interest rates could rise next year to 6% which could then affect their investment plans.
If interest rates were to rise to 6% and the company wishes to maintain its dividend amount, the planned investment expenditure will decrease by:
- A. $100,000
- B. $75,000
- C. $25,000
- D. $50,000
Answer: C
NEW QUESTION 138
XYZ is a multi-national group with subsidiary AA in Country A and subsidiary BB in Country B.
The capital structures of AA and BB are set up to take advantage of the lower tax rate in Country A Thin capitalisation rules in Country B will limit the ability for either AA or BB to claim tax relief on:
- A. interest paid by AA
- B. interest earned by AA
- C. interest earned by BB.
- D. interest paid by BB
Answer: D
NEW QUESTION 139
Company S is planning to acquire Company T.
The shareholders in Company T will receive new shares in Company S in an all-share consideration.
Relevant information:
The shareholders in Company T want sufficient shares to receive a 25% premium on the pre-acquisition value of their shares, based on the pre-acquisition share price.
Which of the following share-for-share offers will achieve the desired result?
- A. 2 shares in Company S for 1 share in Company T
- B. 1 share in Company S for 2 shares in Company T
- C. 10 shares in Company S for 4 shares in Company T
- D. 1 share in Company S for 1 share in Company T
Answer: D
NEW QUESTION 140
A large, listed company is planning a major project that should greatly improve its share price in the long term.
These plans require a significant capital cost that the company plans to finance by debt.
All of the debt options being considered are for the same duration of time.
Which of the following sources of debt finance is likely to be the most expensive for the company over the full term of the debt?
- A. Convertible bonds
- B. Bonds
- C. A finance lease
- D. Bank loan
Answer: A
NEW QUESTION 141
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 cost of capital will be difficult to estimate.
- B. The dividend growth model does not take the time value of money into consideration.
- C. The future projected dividend stream is used as the basis for the valuation.
- D. The company has been unprofitable to date and hence, there is no established dividend payment pattern.
- E. The future growth rate in earnings and dividends will be difficult to accurately determine.
Answer: A,D,E
NEW QUESTION 142
Using the CAPM, the expected return for a company is 11%. The market return is 8% and the risk free rate is
2%.
What does the beta factor used in this calculation indicate about the risk of the company?
- A. It has the same risk as the average market risk.
- B. It is not possible to tell from CAPM.
- C. It has lower risk than the average market risk.
- D. It has greater risk than the average market risk.
Answer: D
NEW QUESTION 143
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