← Back to exam page

F3 – Financial Strategy

Loading demo links...

Showing 10–12 of 15 questions

Question 10

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)

C:\Pasban Work\Cert Paper Exams\CIMA\F3\crack\5382-Kw5.JPG.JPEG

B)

C:\Pasban Work\Cert Paper Exams\CIMA\F3\crack\5393-Kw6.JPG.JPEG

C)

C:\Pasban Work\Cert Paper Exams\CIMA\F3\crack\5404-Kw7.JPG.JPEG

D)

C:\Pasban Work\Cert Paper Exams\CIMA\F3\crack\5415-kw8.JPG.JPEG

Select an option, then click Submit answer.

  • ○

    Option A
  • ○

    Option B
  • ○

    Option C
  • ○

    Option D
Question 11

A consultancy company is dependent for profits and growth on the high value individuals it employs.

The company has relatively few tangible assets.

Select the most appropriate reason for the net asset valuation method being considered unsuitable for such a company.

Select an option, then click Submit answer.

  • ○

    It does not account for the intangible assets.
  • ○

    It accounts for the intangible assets at historical value.
  • ○

    It accounts for intangible assets at net realisable value.
  • ○

    It does not account for tangible assets.
Question 12

A company's current earnings before interest and taxation are $5 million.

These are expected to remain constant for the forseeable future.

The company has 10 million shares in issue which currently trade at $3.60.

It also has a $10 million long term floating rate loan.

The current interest rate on this loan is 5%.

The company pays tax at 20%.

The company expects interest rates to increase next year to 6% and it's Price/Earnings (P/E) ratio to move to 9.5 times by the end of next year.

What percentage reduction in the share price will occur by the end of next year if the interest rate increase and the P/E movement both occur?

Select an option, then click Submit answer.

  • ○

    Reduction of 7%
  • ○

    Reduction of 5%
  • ○

    Reduction of 1%
  • ○

    Reduction of 0%