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| Section | Weight | Objectives |
|---|---|---|
| Business Valuation | 40% | - Valuation methods
|
| Financial Risks | 20% | - Types of financial risk
- Risk management techniques
|
| Financial Policy Decisions | 15% | - Strategic financial objectives and stakeholder impact
|
| Sources of Long-term Funds | 25% | - Dividend policy and distribution strategies - Equity finance
|
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NEW QUESTION # 276
A company with 4 million shares in issue wishes to raise $4 million by means of a rights issue The share price prior to the rights issue is $5.00.
Under the rights issue, 1 million new shares will be issued at $4.00.
When the rights issue is announced it is expected that the Theoretical Ex-rights Price (TERP) will be $4.80 The directors of the company are considering offering any shareholder who does not wish to take up the rights the opportunity to sell the rights back to the company for $1.00.
Which of the following is the most likely consequence of the directors offer?
Answer: D
NEW QUESTION # 277
A company has a 4% corporate bond in issue on which there are two loan covenants.
* Interest cover must not fall below 4 times
* Retained earnings for the year must not fall below S5 00 million
The Company has 100 million shares in issue. The most recent dividend per share was $0 10 The Company intends increasing dividends by 8% next year.
Financial projections tor 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?
Answer: B
Explanation:
This question examines loan covenant compliance, a topic covered in CIMA F3 under Debt Finance, Financial Risk, and Dividend Policy. Loan covenants are contractual restrictions imposed by lenders to protect their interests. Breaching a covenant can trigger penalties or loan repayment demands, so directors must assess compliance carefully using projected financial information.
The company has two covenants:
* Interest cover must not fall below 4 times
* Retained earnings for the year must not fall below $5.00 million
Step 1: Interest Cover Covenant
CIMA F3 defines interest cover as:
From the projections:
* EBIT = $25.00 million
* Interest = $3.20 million
Since 7.8 > 4, the company meets the interest cover covenant.
Step 2: Retained Earnings Covenant
Earnings after tax are projected at $15.26 million.
The most recent dividend per share is $0.10, and dividends are planned to increase by 8%:
With 100 million shares in issue:
Retained earnings for the year:
Since $4.46 million < $5.00 million, the company breaches the retained earnings covenant.
Conclusion (CIMA F3 Interpretation)
* Interest cover covenant: Complied with
* Retained earnings covenant: Breached
Under CIMA F3 guidance, directors must recognise that even when profitability appears strong, dividend policy can cause covenant breaches if distributions are excessive.
NEW QUESTION # 278
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?
Answer: A
NEW QUESTION # 279
Company Z has identified four potential acquisition targets: companies A, B, C and D.
Company Z has a current equity market value of $580 million.
The price it would have to pay for the equity of each company is as follows:
Only one of the target companies can be acquired and the consideration will be paid in cash.
The following estimations of the new combined value of Company Z have been prepared for each acquisition before deduction of the cash consideration:
Ignoring any premium paid on acquisition, which acquisition should the directors pursue?
Answer: B
NEW QUESTION # 280
A company intends to sell one of its business units. Company W, by a management buyout (MBO). A selling price of S200 million has been agreed.
The managers are discussing with a bank and a venture capital company (VCC) the following financing proposal.
The VCC requires a minimum return on its equity investment In the MBO of 35% a year on a compound basis over 5 years. What is the minimum total equity value of Company W in 5 years time in order to meet the VCC's required return? Give your answer to one decimal place.
Answer: A
NEW QUESTION # 281
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