Ultimate Guide to the F3 - Latest Jan 12, 2022 Edition Available Now
2022 Updated Verified Pass F3 Exam - Real Questions & Answers
NEW QUESTION 19
Company M plans to bid for Company J.
Company M has 20 million shares in issue and a current share price of $10.00 before publicly announcing the planned takeover. Company J has 10 million shares in issue and a current share price of $4.00.
The directors of Company M are considering an all-share bid of 1 Company M shares for 2 Company J shares.
Synergies worth $20m are expected from the acquisition.
What is the likely change in wealth for Company M's shareholders (in total) if the bid is accepted?
Give your answer to the nearest $ million.
Answer:
Explanation:
$ ? million
8
NEW QUESTION 20
Company A is a listed company that produces pottery goods which it sells throughout Europe. The pottery is then delivered to a network of self employed artists who are contracted to paint the pottery in their own homes. Finished goods are distributed by network of sales agents.The directors of Company A are now considering acquiring one or more smaller companies by means of vertical integration to improve profit margins.
Advise the Board of Company A which of the following acquisitions is most likely to achieve the stated aim of vertical integration?
- A. A pottery factory in the Middle East.
- B. A company that produces accessories.
- C. A listed international logistics firm.
- D. A company in a similar market to Company A.
Answer: C
NEW QUESTION 21
Company B is an all equity financed company with a cost of equity of 10%.
It is considering issuing bonds in order to achieve a gearing level of 20% debt and 80% equity.
These bonds will pay a coupon rate of 5% and have an interest yield of 6%.
Company B pays corporate tax at the rate of 25%.
According to Modigliani and Miller's theory of capital structure with tax, what will be Company B's new cost of equity?
- A.
- B.
- C.
- D.
Answer: D
NEW QUESTION 22
Two listed companies in the same industry are joining together through a merger.
What are the likely outcomes that will occur after the merger has happened?
Select ALL that apply.
- A. Increase in customer base.
- B. Decrease in employee motivation due to internal changes.
- C. Cost savings from synergistic benefits and economies of scale.
- D. Competition authorities step in to stop a potential price monopoly.
- E. Changes to supplier relationships owing to internal changes.
Answer: A,B,C,E
NEW QUESTION 23
A company has 6 million shares in issue. Each share has a market value of $4.00.
$9 million is to be raised using a rights issue.
Two directors disagree on the discount to be offered when the new shares are issued.
* Director A proposes a discount of 25%
* Director B proposes a discount of 30%
Which THREE of the following statements are most likely to be correct?
- A. Shareholder wealth will be higher under Director A's proposal than under Director B's proposal.
- B. The rights issue price will be $3.00 under Director A's proposal.
- C. The theoretical ex-rights price will be higher under Director B's proposal than under Director A's proposal.
- D. More shares will be issued under Director B's proposal than under Director A's proposal.
- E. The terms of the rights issue will be one new share for every two existing shares under Director A's proposal.
Answer: B,D,E
NEW QUESTION 24
A company financed by equity and debt can be valued by discounting:
- A. free cash flow before interest at WACC.
- B. free cash flow after interest at WACC.
- C. free cash flow after interest at the cost of equity.
- D. free cash flow before interest at the cost of equity.
Answer: A
NEW QUESTION 25
The table below shows the forecast for a company's next financial year:
The forecast incorporates the following assumptions:
* 25% of operating costs are variable
* Debt finance comprises a $400 million fixed rate loan at 5%
* Corporate income tax is paid at 25%
The company plans to do the following next year from the forecast earnings on the assumption that earnings will be equivalent to free cash flow:
* Pay a total dividend of $20 million
* Invest $40 million in new projects
What is the maximum % reduction in operating activity that could occur next year before the company's dividend and investment plans are affected?
Give your answer to the nearest 0.1%.
Answer:
Explanation:
4.8, 4.7, 4.9, 5.0, 4.6, 4.80, 4.70, 4.90, 5.00, 4.60%
NEW QUESTION 26
A company is planning to repurchase some of its shares. Relevant details are as follows:
* 100 million shares in issue
* Current share price $5
* 5 million shares to be repurchased
* 10% repurchase premium
* Repurchased shares to be cancelled
What would you expect the share price after the repurchase to be?
Give your answer to two decimal places.
Answer:
Explanation:
$ ?
4.97, 4.98
NEW QUESTION 27
A company is planning to repurchase some of its shares. Relevant details are as follows:
* 100 million shares in issue
* Current share price $5
* 5 million shares to be repurchased
* 10% repurchase premium
* Repurchased shares to be cancelled
What would you expect the share price after the repurchase to be?
Give your answer to two decimal places.
$ ?
Answer:
Explanation:
4.97, 4.98
NEW QUESTION 28
Extracts from a company's profit forecast for the next financial year as follows:
Since preparing the forecast, the company has decided to return surplus cash to shareholders by a share repurchase arrangement.
The share repurchase would result in the company purchasing 20% of the 1,250 million ordinary shares currently in issue and canceling them.
Assuming the share repurchase went ahead, the impact on the company's forecast earnings per share will be an increase of:
- A. $0.175
- B. $0.125
- C. $0.100
- D. $0.200
Answer: C
NEW QUESTION 29
XYZ has a variable rate loan of $200 million on which it is paying interest of Liber ' 3%.
XYZ entered into a swap with AG bank to convert this to a fixed rate 8% loan. AB bank charges an annual commission of 0.4% for making this arrangement Calculate the net payment from KYZ to AB bank at the end of the first year if Libor was 2% throughout the year.
Give your answer in $ million, to one decimal place.
Answer:
Explanation:
22.8
NEW QUESTION 30
Company X plans to acquire Company Y.
Pre-acquisition information:
Post-acquisition information:
Total combined earnings are expected to increase by 10%
Total combined P/E multiple will remain at 10 times
Which of the following share-for-share exchanges will result in an increase of 10% in Company X's share price post-acquisition?
- A. 1 share in Company X for 2 shares in Company Y
- B. 1 share in Company X for 2.75 shares in Company Y
- C. 3 shares in Company X for 5 shares in Company Y
- D. 2 shares in Company X for 1 shares in Company Y
Answer: C
NEW QUESTION 31
The value of a call option will increase because of:
- A. A decrease in the volatility of the share.
- B. An increase in the time to expiry.
- C. An increase in the strike price.
- D. A decrease in the market value of the share
Answer: D
NEW QUESTION 32
A national airline has made an offer to acquire a smaller airline in the same country.
Which of the following would be of most concern to the competition authorities?
- A. After the acquisition the board propose to increase prices significantly on routes where no other airlines operate.
- B. The acquisition is likely to result in significant redundancies of staff currently working for the smaller airline.
- C. The board informed a major institutional shareholder about the proposed acquisition before informing other shareholders.
- D. After the acquisition the board propose to reduce the number of flight destinations from the country.
Answer: A
NEW QUESTION 33
A company is wholly equity funded. It has the following relevant data:
* Dividend just paid $4 million
* Dividend growth rate is constant at 5%
* The risk free rate is 4%
* The market premium is 7%
* The company's equity beta factor is 1.2
Calculate the value of the company using the Dividend Growth Model.
Give your answer in $ million to 2 decimal places.
$ ? million
Answer:
Explanation:
56.76, 56.75
NEW QUESTION 34
An entity prepares financial statements to 30 June.
During the year ended 30 June 20X2 the following events occurred:
1 July 20X1
* The entitiy borrowed $100 million at a variable rate of interest.
* In order to protect itself against the variability of its interest cashflows, the entity entered into a pay-fixed-receive-variable interest swap with annual settlements. The fair value of the swap on this date was zero.
30 June 20X2
* The entity received a net settlement of $2 million under the swap. After this net settlement, the fair value of the swap was $5 million - a financial asset.
The entity decides to use hedge accounting for this arrangement and has designated it as a cash flow hedge.
The swap is a perfect hedge of the variability of the cash interest payments.
Which of the following describes the treatment of the settlement and the change in the fair value of the swap in the statement of profit or loss and other comprehensive income for the year ended 30 June 20X2?
- A. $5 million is recognised in profit or loss and $2 million is recognised in other comprehensive income.
- B. $2 million is recognised in profit or loss and $5 million is recognised in other comprehensive income.
- C. $7 million is recognised in other comprehensive income.
- D. $7 million is recognised in profit or loss.
Answer: B
NEW QUESTION 35
Company M is a listed company in a highly technical service industry.
The directors are considering making a cash offer for the shares in Company Q, an unquoted company in the same industry.
Relevant data about Company Q:
* The company has seen consistent growth in earnings each year since it was founded 10 years ago.
* It has relatively few non-current assets.
* Many of the employees are leading experts in their field. A recent exercise suggested that the value of the company's human capital exceeded the value of its tangible assets.
The directors and major shareholders of Company Q have indicated willingness to sell the company.
Before negotiations become too advanced, the directors of Company M are considering the benefits to their company that would follow the acquisition.
Which THREE of the following are the most likely benefits of the acquisition to Company M's shareholders?
- A. Reduction of risk through diversification.
- B. Improved asset backing for borrowing due to the acquisition of intangible assets.
- C. Access to technical expertise.
- D. Gain economies of scale.
- E. Improve earnings per share (EPS).
Answer: C,D,E
NEW QUESTION 36
A company is deciding whether to offer a scrip dividend or a cash dividend to its shareholders.
Although the company has excellent long-term growth prospects, it is experiencing short-term profit and cash flow problems.
Which of the following statements is most likely to be a reason for choosing the scrip dividend?
- A. It is a way of increasing earnings per share.
- B. It is a way of encouraging shareholders to allow cash to be retained in the business.
- C. It is a way of increasing dividend per share.
- D. It is a way of raising additional finance to promote future growth.
Answer: B
NEW QUESTION 37
Company H is considering the valuation of an unlisted company which it hopes to acquire.
It has obtained the target company's financial statements.
Company H has been advised that the book value of net assets as shown in the financial statements of the target company does not provide a reliable indicator of their true value.
Advise the Board of Directors which of the following THREE statements are disadvantages of the net asset basis of valuation?
- A. The net realisable value is usually different from the net book value shown in the financial statements.
- B. The net book value of assets can be obtained from the financial statements.
- C. Intangible assets are often not shown in the company's financial statements.
- D. The net book value of current assets is normally a reliable indicator of their realisable value.
- E. The net book value of assets is merely a record of past transactions which complies with accounting conventions.
Answer: A,C,E
NEW QUESTION 38
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