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| Section | Objectives |
|---|---|
| Dividend Policy | - Dividend decisions and shareholder value - Dividend theories |
| Sources of Long-Term Finance | - Equity and debt financing - Hybrid financial instruments |
| Mergers, Acquisitions and Corporate Restructuring | - Synergies and takeover strategies - Valuation principles |
| Financial Risk Management | - Foreign exchange risk - Interest rate risk |
| Financial Strategy Formulation | - Corporate financial planning - Strategic financial objectives |
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NEW QUESTION # 47
A company has an opportunity to invest in a positive net present value project, but the project would require debt finance that would push the company's gearing ever a limit imposed by a debt covenant on an existing loan.
Which THREE of the following actions could be taken by the company?
Answer: C,D,F
Explanation:
Acceptable actions:
Negotiate with lenders (A)
Drop the project if funding would breach the covenant (B)
Look for other finance such as cutting dividends (D)
Breaching covenants deliberately or relying on shareholders to "approve" a breach is not acceptable.
NEW QUESTION # 48
A company which is forecast to experience a strong growth in its profitability is evaluating a potential bond issue.
Which of the following changes in corporate income tax and in bond yields would make the bond issue more attractive to the company?
Answer: C
Explanation:
Debt becomes more attractive when:
Corporate tax increases # larger tax shield on interest.
Bond yields decrease # lower pre-tax cost of debt.
So the combination that makes a bond issue more attractive is higher tax and lower yields.
NEW QUESTION # 49
A venture capitalist is considering investing in a management buy-out that would be financed as follows:
* Equity from managers
* Equity from a venture capitalist
* Mezzanine debt finance from a venture capitalist
* Senior debt from a bank
The venture capitalist is planning to work with the management to grow the business in anticipation of an initial public offering within five years.
However, the cash forecast shows a potential shortage of funds in the first year and the venture capitalist is evaluating the potential impact of cash being generated in the first year being significantly lower than forecast.
The most important risk that a shortage of cash would create for the management buyout is that the new company has insufficient funds to:
Answer: D
Explanation:
In an MBO structure, senior bank debt has first claim on cash flows. Failure to pay interest on this debt can trigger default, covenants being breached, and potentially insolvency or loss of control.
Director bonuses (B) and dividends to the VC (C) are discretionary and can usually be postponed.
Inability to invest in new projects (D) is harmful for growth but less immediately threatening than defaulting on senior debt.
So the most critical cash use that must be covered is interest on bank debt.
NEW QUESTION # 50
Company J plans to acquire Company K, an unlisted company whose equity is to be valued using a P/E ratio approach.
A listed company has been identified which is very similar to Company K and which can be used as a proxy.
However, the growth prospects of Company K are higher than those of the proxy.
The Directors of Company J are aware that certain adjustments will be necessary to the proxy company's P
/E ratio in order to obtain a more reliable valuation.
The following adjustments have been agreed:
* 20% due to Company K being unlisted.
* 15% to allow for the growth rate difference.
The total adjustment to the proxy p/e ratio is:
Answer: C
NEW QUESTION # 51
HHH Company has a fixed rate loan at 10.0%, but wishes to swap to variable. It can borrow at the risk-free rate +8%. The bank is currently quoting swap rates of 3.1% (bid) and 3.5% (ask). What net rate will HHH Company pay if it enters into the swap?
Answer: B
Explanation:
This question tests understanding of interest rate swaps, a core topic in CIMA F3: Financial Strategy, particularly under financial risk management.
Step 1: Identify the company's current position
HHH Company currently has fixed-rate debt at 10.0%
It wants to swap to variable interest
Its floating-rate borrowing cost is risk-free rate + 8%
Step 2: Interpret the swap quotation
The bank quotes swap rates of:
3.1% (bid)
3.5% (ask)
In CIMA F3:
If a company wants to pay fixed and receive floating, it must pay the ask rate.
Therefore, HHH will pay fixed 3.5% and receive floating (risk-free rate) under the swap.
Step 3: Combine the loan and the swap
Component
Cash flow
Fixed loan
Pay 10.0% fixed
Swap
Pay 3.5% fixed, receive risk-free rate
Net fixed paid:
10.0%#3.5%=6.5%10.0\% - 3.5\% = 6.5\%10.0%#3.5%=6.5%
So after the swap, the company effectively pays:
Risk-free rate+6.5%\text{Risk-free rate} + 6.5\%Risk-free rate+6.5%
Step 4: Select the correct option
Risk-free rate + 6.5% #
NEW QUESTION # 52
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