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| Section | Weight | Objectives |
|---|---|---|
| Topic 1: Financial Policy Decisions | 15% | - Strategic financial objectives and stakeholder impact
|
| Topic 2: Business Valuation | 40% | - Valuation methods
- Investment appraisal
|
| Topic 3: Sources of Long-term Funds | 25% | - Dividend policy and distribution strategies - Debt finance
|
| Topic 4: Financial Risks | 20% | - Risk management techniques
|
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NEW QUESTION # 305
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?
Answer: A,B,D
Explanation:
Company HGG is young, unlisted, loss-making so far, and has uncertain growth.
Weaknesses of using the dividend growth model here:
A). Future growth rate in earnings/dividends is hard to estimate - very true for an early-stage, high-uncertainty business.
C). It has been unprofitable and has no established dividend pattern, so the basic inputs to the model (D# and g) are unreliable.
E). Cost of capital is difficult to estimate for an unlisted company (no directly observable beta or market data).
B is just a description of the model, not a specific weakness here, and D is incorrect because the dividend growth model does discount future dividends (it fully incorporates time value of money).
# Answer Q121: A, C, E
NEW QUESTION # 306
Assume today is 31 December 20X1.
A listed mobile phone company has just launched a new phone which is proving to be a great success.
As a direct result of the product's success, earnings are forecast to increase by:
* 5% a year in each of years 20X2 - 20X6
* 3% from 20X7 onwards
Market analysts were very excited to hear the news of the success of the product and future growth forecasts.
Assuming a semi-efficient market applies, which of the following company valuation methods is likely to give the best estimate of the company's equity value today?
Answer: C
NEW QUESTION # 307
Which TWO of the following statements about debt instruments are correct?
Answer: A,B
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 # 308
On 31 October 20X3:
* A company expected to agree a foreign currency transaction in January 20X4 for settlement on 31 March
20X4.
* The company hedged the currency risk using a forward contract at nil cost for settlement on 31 March
20X4.
* The transaction was correctly treated as a cash flow hedge in accordance with IAS 39 Financial Instruments: Recognition and Measurement.
On 31 December 20X3, the financial year end, the fair value of the forward contract was $10,000 (asset).
How should the increase in the fair value of the forward contract be treated within the financial statements for the year ended 31 December 20X3?
Answer: C
Explanation:
Under IAS 39, a derivative such as a forward contract must always be measured at fair value in the statement of financial position. When that derivative is designated as a cash flow hedge of a highly probable forecast transaction and hedge accounting criteria are met, the effective portion of the gain or loss on the hedging instrument is recognised in Other Comprehensive Income (OCI), not in profit or loss.
Here, by 31 December 20X3 the forward contract (entered at nil cost) has a positive fair value of $10,000, so there is a gain of $10,000. Because the hedge has been correctly designated as a cash flow hedge, that gain is treated as part of the cash flow hedge reserve in equity via OCI. It will be recycled to profit or loss in a later period when the hedged transaction affects profit or loss (e.g. when the forecast foreign currency transaction occurs).
So for the year ended 31 December 20X3, the correct treatment is to recognise a $10,000 gain in OCI - answer D.
NEW QUESTION # 309
A company wishes to raise additional debt finance and is assessing the impact this will have on key ratios.
The following data currently applies:
* Profit before interest and tax for the current year is $500,000
* Long term debt of $300,000 at a fixed interest rate of 5%
* 250,000 shares in issue with a share price of $8
The company plans to borrow an additional $200,000 on the first day of the year to invest in new project which will improve annual profit before interest and tax by $24,000.
The additional debt would carry an interest rate of 3%.
Assume the number of shares in issue remain constant but the share price will increase to $8.50 after the investment.
The rate of corporate income tax is 30%.
After the investment, which of the following statements is correct?
Answer: A
Explanation:
PBIT = $500,000
Existing interest = 5% × 300,000 = $15,000
Profit before tax = 500,000 # 15,000 = $485,000
Tax (30%) = 0.30 × 485,000 = $145,500
Earnings = 485,000 # 145,500 = $339,500
Shares = 250,000 # EPS = 339,500 / 250,000 # $1.36
Share price = $8 # P/E # 8 / 1.36 # 5.9
Interest cover = PBIT / Interest = 500,000 / 15,000 # 33.3 times
After the new debt and project:
New PBIT = 500,000 + 24,000 = $524,000
New interest = 15,000 + (3% × 200,000) = 15,000 + 6,000 = $21,000
Profit before tax = 524,000 # 21,000 = $503,000
Tax (30%) = 0.30 × 503,000 = $150,900
Earnings = 503,000 # 150,900 = $352,100
EPS = 352,100 / 250,000 # $1.41
New share price = $8.50
New P/E # 8.50 / 1.41 # 6.0 (higher than before)
New interest cover = 524,000 / 21,000 # 25.0 times (lower than before).
So:
Interest cover falls
P/E ratio rises
Correct option: B.
NEW QUESTION # 310
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