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F3 – Financial Strategy

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Showing 1–3 of 15 questions

Question 1

Which THREE of the following long term changes are most likely to increase the credit rating of a company?

Select all that apply, then click Submit answer.

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    An increase in the interest cover ratio.
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    A decrease in the (Net debt) / (Earnings before interest tax depreciation and amortisation) ratio.
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    An increase in the free cashflow generated from operations.
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    A decrease in the (Book value of debt) / (Book value of equity) ratio.
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    A decrease in the dividend cover ratio.
Question 2

A company's Board of Directors is assessing the likely impact of financing new projects by using either debt or equity finance.

The impact of using debt or equity finance on some key variables is uncertain.

Which THREE of the following statements are true?

Select all that apply, then click Submit answer.

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    The use of equity finance reduces the company's overall financial risk.
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    The use of equity finance will create pressure for increases in dividend per share in the future.
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    The use of debt finance will always result in an increase in earnings per share.
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    Retained earnings is the cheapest form of equity finance.
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    The use of debt finance increases the cost of equity.
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    The use of debt finance is always preferable to equity finance.
Question 3

A company plans a four-year project which will be financed by either an operating lease or a bank loan.

Lease details:

• Four year lease contract.

• Annual lease rentals of $45 000 paid in advance on the 1st day of the year.

Other information:

• The interest rate payable on the bank borrowing is 10%.

• The capital cost of the project is $200 000 which would have to be paid at the beginning of the first year.

• A salvage or residual value of $100 000 is estimated at the end of the project's life.

• Purchased assets attract straight line tax depreciation allowances.

• Corporate income tax is 20% and is payable at the end of the year following the year to which it relates.

A lease-or-buy appraisal is shown below:

Which THREE of the following items are errors within the appraisal?

Select all that apply, then click Submit answer.

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    Lease payments are timed incorrectly
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    Tax relief on lease payments have not been lagged correctly
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    Using the 10% discount rate is incorrect
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    The project's operating cashflows should be included
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    The bank loan repayments should be included
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    The salvage value has been included within the lease option