CIMA F3 Financial Strategy CIMAPRA19-F03-1 Exam Questions in PDF

A company proposes to value itself based on the net present value of estimated future cash flows.

Relevant data:

· The cash flow for the next three years is expected to be £100 million each year

· The cash flow after year 3 will grow at 2% to perpetuity

· The cost of capital is 12%

The value of the company to the nearest $ million is:

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?

An all equity financed company reported earnings for the year ending 31 December 20X1 of $5 million.

One of its financial objectives is to increase earnings by 5% each year.

In the year ending 31 December 20X2 it financed a project by issuing a bond with a $1 million nominal value and a coupon rate of 7%.

The company pays corporate income tax at 30%.

If the company is to achieve its earnings target for the year ending 31 December 20X2, what is the minimum operating profit (profit before interest and tax) that it must achieve?

Which THREE of the following non-financial objectives would be most appropriate for a listed company in the food retailing industry?

A company has a financial objective of maintaining a gearing ratio of between 30% and 40%, where gearing is defined as debt/equity at market values.

The company has been affected by a recent economic downturn leading to a shortage of liquidity and a fall in the share price during 20X1.

On 31 December 20X1 the company was funded by:

· Share capital of 4 million $1 shares trading at $4.0 per share.

· Debt of $7 million floating rate borrowings.

The directors plan to raise $2 million additional borrowings in order to improve liquidity.

They expect this to reassure investors about the company's liquidity position and result in a rise in the share price to $4.2 per share.

Is the planned increase in borrowings expected to help the company meet its gearing objective?