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| Section | Objectives |
|---|---|
| Topic 1: Financial Strategy Formulation | - Strategic financial objectives - Corporate financial planning |
| Topic 2: Mergers, Acquisitions and Corporate Restructuring | - Synergies and takeover strategies - Valuation principles |
| Topic 3: Financial Risk Management | - Interest rate risk - Foreign exchange risk |
| Topic 4: Dividend Policy | - Dividend decisions and shareholder value - Dividend theories |
| Topic 5: Sources of Long-Term Finance | - Equity and debt financing - Hybrid financial instruments |
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NEW QUESTION # 357
Company A has made an offer to acquire Company Z.
Both companies are quoted and their current market share prices are:
* Company A - $4
* Company Z - $5
Shareholders in company Z have been given three alternative offers:
* Cash of $5.50 per share
* Share for share exchange on the basis of 3 for 2
* 10.5% long dated bond for every 20 shares
The bond is has a nominal value of $100 and the expected yield on bonds of similar risk is 10%.
You are advising a Company Z shareholder on the three offers.
She requires a 15% premium if she is to accept the offer.
In providing your advice, which of the following statements is correct?
Answer: B
Explanation:
Quick check of each offer (per Company Z share):
Current price of Z: $5
Required 15% premium:
5×1.15=5.755 \times 1.15 = 5.755×1.15=5.75
Cash offer = $5.50
Premium = (5.50 # 5) / 5 = 10% # below 15%
Share-for-share: 3 A shares for every 2 Z shares
For 1 Z share # 1.5 A shares
A's price = $4 # value = 1.5 × 4 = $6.00
Premium = (6 # 5) / 5 = 20% # above 15%
Bond offer: 1 bond for every 20 Z shares
Coupon = 10.5% of 100 = 10.5
Required yield = 10% # bond value # 10.5 / 0.10 = $105
Value per Z share = 105 / 20 = $5.25
Premium = (5.25 # 5) / 5 = 5% # below 15%
So only the share exchange meets her required premium # C is correct.
NEW QUESTION # 358
Company E is a listed company. Its directors are valuing a smaller listed company, Company F, as a possible acquisition.
The two companies operate in the same markets and have the same business risk.
Relevant data on the two companies is as follows:
Both companies are wholly equity financed and both pay corporate tax at 30%.
The directors of Company E believe they can "bootstrap" Company F's earnings to improve performance.
Calculate the maximum price that Company E should offer to Company F's shareholders to acquire the company.
Give your answer to the nearest $million.
Answer: D
NEW QUESTION # 359
Delta and Kappa both wish to borrow $50m.
Delta can borrow at a fixed rate of 12% or at a floating rate of the risk-free rate +3% Kappa can borrow at 15% fixed or the risk-free rate +4%.
Delta wishes a variable rate loan and Kappa a fixed rate loan The bank for the two companies suggests a swap arrangement The two companies agree to a swap arrangement, sharing savings equally What is the effective swap rate for each company?
Answer: C
NEW QUESTION # 360
A company's directors plan to increase gearing to come in line with the industry average of 40%. They need to know what the effect will be on the company's WACC.
According to traditional theory of gearing the WACC is most likely to:
Answer:
Explanation:
Explanation:
Increase initially then decrease
This question tests understanding of the traditional theory of capital structure, a core topic within CIMA F3 under Cost of Capital and Capital Structure. The traditional view differs from Modigliani and Miller by arguing that there is an optimal capital structure where a company's Weighted Average Cost of Capital (WACC) is minimised.
According to traditional theory, at low levels of gearing, introducing debt into the capital structure reduces WACC. This occurs because debt is generally cheaper than equity, largely due to lower risk for lenders and the tax deductibility of interest payments. Initially, equity holders do not perceive a significant increase in financial risk, so the cost of equity remains relatively stable. As a result, replacing some equity with cheaper debt lowers the overall WACC.
However, as gearing continues to rise beyond a certain point, the financial risk borne by both debt holders and equity holders increases substantially. Lenders demand higher interest rates to compensate for increased default risk, and shareholders require a higher return due to greater earnings volatility. This leads to rising costs of both debt and equity. Beyond the optimal gearing level, these rising costs outweigh the benefits of cheaper debt, causing WACC to increase.
CIMA F3 study guidance therefore concludes that under traditional theory, WACC:
* Falls initially as gearing increases, and
* Rises after the optimal capital structure is exceeded.
Since the directors are increasing gearing toward an industry average, the most appropriate description of WACC behaviour under traditional theory is that it will decrease initially and then increase.
NEW QUESTION # 361
An aerospace company is planning to diversify into car manufacturing.
Relevant data:
What is the the cost of equity to be used in the WACC for the project appraisal?
Give your answer in percentage, as a whole number.
Answer:
Explanation:
19%
NEW QUESTION # 362
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