Free CIMA CIMAPRO19-F03-1-ENG Exam Questions

Question 1

A company has a covenant on its 5% long term corporate bond.

• Covenant - The earnings must not fall below $7 million

The bond has a nominal value of $60 million.

It is currently trading at 80% of its nominal value.

The projected earnings before interest and taxation for next year are $11.5 million.

The company retains 80% of its earnings. It pays tax at 20%.

Advise the Board of Directors which of the following covenant conditions will apply next year?

A : earnings will be = $7.28 million (The covenant will not be breached).

B : earnings will be = $11.50 million (The covenant will not be breached).

C : earnings will be = $6.80 million (The covenant will be breached).

D : earnings will be = $5.44 million (The covenant will be breached).

Answer: C

Question 2

A company has accumulated a significant amount of excess cash which is not required for investment for the

foreseeable future.

It is currently on deposit, earning negligible returns.

The Board of Directors is considering returning this excess cash to shareholders using a share repurchase

programme.

The majority of shareholders are individuals with small shareholdings.

Which THREE of the following are advantages of the company undertaking a share repurchase programme?

A : dividual shareholders can realise their investment if they wish.

B : earnings per share should increase for the shareholders who do not sell their shares.

C : reduces excess cash which might have been attractive to predators.

D : reduces the amount of cash for potential future investment opportunities.

E : titutional investors generally prefer a constant predictable income in the form of dividends.

Answer: A,B,C

Question 3

A company is concerned that a high proportion of its debt portfolio consists of variable rate finance with an

interest rate of LIBOR ' 1 .0%.

It is considering using an interest rate swap to reduce interest rate risk out is concerned about additional

finance cost this might create.

A bank has quoted swap rates of 3% 3.5% against LIBOR.

Is an interest rate swap likely to be beneficial to the company at current LIBOR rates?

A : , because it would be cheaper to repay variable rate finance aid enter into new fixed rate finance than to enter into an interest rate swap

B : , because it will have lower interest rate risk and interest cost remains the same.

C : , because interest cost will decrease with the interest rate swap in place.

D : , because interest cost will increase with the interest rate swap in place.

Answer: B

Question 4

Company C is a listed company. It is currently considering the acquisition of Company D. The original

founder of Company C currently owns 52% of the shares.

Alternative forms of consideration for Company D being considered are as follows:

• Cash payment, financed by new borrowing

• issue of new shares in Company C

Which of the following is an advantage of a cash offer over a share-for exchange from the viewpoint of the

original founder of Company C?

A : hare for share exchange would result in a significant change in control of Company C whereas a cash offer would not

B : hare-for-share exchange would require the approval shareholders in Company C but a cash offer would not.

C : hare-for-share exchange would require the approval of the Competition Authorities but a cash offer would not.

D : cash offer would result in a lower gearing ratio therefore reduce the weighted overage cost of capital whereas a cash offer would not

Answer: A

Question 5

A listed company in a high growth industry, where innovation is a key driver of success has always operated a

residual dividend policy, resulting in volatility in dividends due to periodic significant investments in research

and development.

The company has recently come under pressure from some investors to change its dividend policy so that

shareholders receive a consistent growing dividend. In addition, they suggested that the company should use

more debt finance.

If the suggested change is made to the financial policies, which THREE of the following statements are true?

A : may give a signal to the market that the company is entering a period of stable growth.

B : ere may be a change to the shareholder profile due to 'the clientele effect'.

C : directors will not have to take shareholder dividend preferences into consideration in future.

D : tained earnings have a lower cost than debt finance.

E : company's financial risk will increase due to its increased use of debt finance.

Answer: A,B