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NEW QUESTION # 243
Which of the following statements is true of a spin-off (or demerger)?
Answer: C
Explanation:
A spin-off/demerger normally involves separating a division or subsidiary and giving its shares to the existing shareholders. It doesn't in itself raise finance (A), it doesn't introduce new shareholders to the core entity (B), and it does not inherently increase takeover risk (D). Its main advantage is that it allows the market to value the demerged business separately, revealing its "true" value - C is correct.
NEW QUESTION # 244
Which of the following statements are true with regard to interest rate swaps?
Select ALL that apply.
Answer: B,D
Explanation:
Interest rate swaps are covered in CIMA F3 under risk management and derivative instruments, specifically as tools for managing interest rate risk. An interest rate swap is an agreement between two parties to exchange interest payment obligations, typically swapping fixed-rate interest payments for floating-rate payments, or vice versa, on a notional principal amount.
Option A is TRUE.
CIMA F3 recognises that although swaps are primarily used for hedging, some companies may enter into interest rate swaps for speculative or risk-taking purposes. If management believes it has superior forecasts of future interest rate movements compared to the market, it may deliberately increase exposure to interest rate risk by swapping into floating rates or fixed rates accordingly. This behaviour is discussed in F3 as speculation rather than pure hedging.
Option E is TRUE.
An interest rate swap is an external hedging technique. CIMA F3 clearly distinguishes between:
Internal hedging (e.g. matching assets and liabilities, netting, leading and lagging), and External hedging, which involves using financial instruments with third parties, such as forwards, futures, options and swaps.
Since a swap involves a counterparty (often a bank or financial institution), it is classified as an external hedge.
The remaining options are incorrect:
B is FALSE. Default risk does not automatically become "high" for the floating-rate payer when interest rates rise; it depends on the firm's overall financial strength and cash flows. Rising rates increase payments, but not necessarily default risk to a high level.
C is FALSE. When interest rates fall, the fixed-rate payer is at a disadvantage (paying above-market rates), which may increase rather than reduce financial strain.
D is FALSE. An interest rate swap is not an internal hedging technique; it requires an external counterparty.
NEW QUESTION # 245
A venture capitalist has made an equity investment in a private company and is evaluating possible methods by which it can exit the investment over the next 3 years. The private company shareholders comprise the four original founders and the venture capitalist.
Advise the venture capitalist which THREE of the following methods will enable it to exit its equity investment?
Answer: A,B,D
Explanation:
A). Private company buys back the equity shares - VC can sell its shares back to the company # full exit.
C). Company obtains a stock market listing - creates a market for the shares; VC can sell on IPO or in the market # exit.
E). Trade sale of shares to an external 3rd party - classic VC exit route.
A rights issue (B) or stock split (D) do not, by themselves, provide an exit - they just change capital structure or number of shares.
NEW QUESTION # 246
A company gas a large cash balance but its directors have been unable to identify any positive NPV projects to invest in. Which THREE of the following are advantages of a share repurchase, compared with a one-off large dividend?
Answer: A,B,D
NEW QUESTION # 247
A listed company is planning a share repurchase.
The following data applies:
* There are 10 million shares in issue
* The share repurchase will involve buying back 20% of the shares at a price of $0.75
* The company is holding $2 million cash
* Earnings for the current year ended are $2 million
The Directors are concerned about the impact that this repurchase programme will have on the company's cash balance and current year earnings per share (EPS) ratio.
Advise the directors which of the following statements is correct?
Answer: D
Explanation:
(Cash used = 2m shares × $0.75 = $1.5m; from $2m # 75% fall.
EPS: before = 2m / 10m = $0.20; after = 2m / 8m = $0.25 # 25% increase.)
NEW QUESTION # 248
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