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| Section | Weight | Objectives |
|---|---|---|
| Financial Strategy Framework | 25% | - Financial objectives and stakeholder value
|
| Investment Appraisal and Decisions | 25% | - Investment evaluation techniques
|
| Corporate Finance | 30% | - Financing decisions
|
| Mergers, Acquisitions and Business Valuation | 10% | - Valuation and deal structure
|
| Financial Risk Management and Treasury | 10% | - Risk management techniques
|
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NEW QUESTION # 105
A company has stable earnings of S2 million and its shares are currently trading on a price earnings multiple {PIE) of 10 times. It has10 million shares in issue.
The company is raising S4 million debt finance to fund an expansion of its existing business which is forecast to increase annual earnings straight away by 25% and then remain at that level for the foreseeable future. The corporation tax rate is 20%. It is expected that the P/E will reduce to 8 times over the next year.
What is the most likely change in shareholder wealth resulting from this plan?
Answer: A
NEW QUESTION # 106
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: A,B
NEW QUESTION # 107
A listed company is financed by debt and equity.
If it increases the proportion of debt in its capital structure it would be in danger of breaching a debt covenant imposed by one of its lenders.
The following data is relevant:
The company now requires $800 million additional funding for a major expansion programme.
Which of the following is the most appropriate as a source of finance for this expansion programme?
Answer: B
Explanation:
In CIMA F3, when selecting an appropriate source of finance, you match the type and maturity of finance to the purpose of the funds, and you must also respect any constraints such as debt covenants and target gearing.
Here the company "is financed by debt and equity" and is already close to breaching a debt covenant if it increases the proportion of debt. That immediately rules out additional long-term borrowing such as a private placement of a bond (B) and also makes a bank overdraft (D) inappropriate: an overdraft is short-term, potentially repayable on demand, and is still debt, so it worsens gearing and covenant pressure.
The project is a major expansion programme, so it requires long-term, stable capital. F3 material emphasises that for a listed company needing substantial equity finance, a rights issue is usually the preferred mechanism:
it raises new equity, does not increase financial risk, and allows existing shareholders to maintain their proportional ownership by taking up their rights.
"Retained earnings" (A) represent accumulated past profits already part of equity; they are not a mechanism for raising an immediate $800m of new cash for investment. Therefore, the most appropriate source of finance in this situation is a rights issue.
NEW QUESTION # 108
A company has:
* A price/earnings (P/E) ratio of 10.
* Earnings of $10 million.
* A market equity value of $100 million.
The directors forecast that the company's P/E ratio will fall to 8 and earnings fall to $9 million.
Which of the following calculations gives the best estimate of new company equity value in $ million following such a change?
Answer: D
NEW QUESTION # 109
A company has 8% convertible bonds in issue. The bonds are convertible in 3 years time at a ratio of 20 ordinary shares per $100 nominal value bond.
Each share:
* has a current market value of $5.60
* is expected to grow at 5% each year
What is the expected conversion value of each $100 nominal value bond in 3 years' time?
Answer: A
NEW QUESTION # 110
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