F3 Financial Strategy Certification Exam Questions with AI Explanations

QUESTION: 73

Company A has a cash surplus. The discount rate used for a typical project is the company's weighted average cost of capital of 10%. No investment projects will be available for at least 2 years.
Which of the following is currently most likely to increase shareholder wealth in respect of the surplus cash?

Investing in a 2 year bond returning 5% each year.
Investing in the local money market at 4% each year.
Maintaining the cash in a current account.
Paying the surplus cash as a dividend at the earliest opportunity.

Answer(s): D

Explanation:

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QUESTION: 74

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

Reduce customer complaints
Increase customer service quality
Reduce production time
Improve staff morale
Reduce raw material wastage

Answer(s): A,B,D

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QUESTION: 75

A company wishes to raise additional debt finance and is assessing the impact this will have on key ratios. The following data currently applies:
* Profit before interest and tax for the current year is $500,000
* Long term debt of $300,000 at a fixed interest rate of 5%
* 250,000 shares in issue with a share price of $8 The company plans to borrow an additional $200,000 on the first day of the year to invest in new project which will improve annual profit before interest and tax by $24,000. The additional debt would carry an interest rate of 3%. Assume the number of shares in issue remain constant but the share price will increase to $8.50 after the investment. The rate of corporate income tax is 30%.
After the investment, which of the following statements is correct?

Interest cover will fall; P/E ratio will fall.
Interest cover will fall; P/E ratio will rise.
Interest cover will rise; P/E ratio will rise.
Interest cover will rise; P/E ratio will fall.

Answer(s): B

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QUESTION: 76

Under traditional theory, an increase in a company's WACC would cause the value of the company to:

Increase
Decrease
Stay the same
Either increase or decrease

Answer(s): B

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QUESTION: 77

An analyst has valued a company using the free cash flow valuation model.
The analyst used the following data in determining the value:
* Estimated free cashflow in 1 year's time = $100,000
* Estimated growth in free cashflow after the first year = 5% each year indefinitely
* Appropriate cost of equity = 10%
The result produced by the analyst was as follows: Value of equity = $100,000 (1+0.05)/0.10 = $1,050,000 The analyst made a number of errors in determining the value.
By how much has the analyst undervalued the company?

$950,000
$2,000,000
$2,100,000
$1,050,000

Answer(s): A

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QUESTION: 78

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.

Increase in customer base.
Competition authorities step in to stop a potential price monopoly.
Decrease in employee motivation due to internal changes.
Changes to supplier relationships owing to internal changes.
Cost savings from synergistic benefits and economies of scale.

Answer(s): A,C,D,E

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QUESTION: 79

Using the CAPM, the expected return for a company is 11%. The market return is 8% and the risk free rate is 2%.
What does the beta factor used in this calculation indicate about the risk of the company?

It has greater risk than the average market risk.
It has lower risk than the average market risk.
It has the same risk as the average market risk.
It is not possible to tell from CAPM.

Answer(s): A

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QUESTION: 80

A company has forecast the following results for the next financial year:
The following is also relevant:
* Profit after tax for the year can be assumed to be equivalent to free cash flow for the year.
* Debt finance comprises a $10 million floating rate loan which currently carries an interest rate of 5%.
* $400,000 investment in non-current assets is required to achieve required growth, all of which is to financed from next year's free cash flow.
* The company plans to pay a dividend of $150,000 next year, financed from next year's free cash flow. The company is concerned that interest rates could rise next year to 6% which could then affect their investment plans.

If interest rates were to rise to 6% and the company wishes to maintain its dividend amount, the planned investment expenditure will decrease by:

$25,000
$75,000
$50,000
$100,000

Answer(s): A

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CIMA F3 Financial Strategy F3 Financial Strategy Dumps in PDF

Free CIMA F3 Financial Strategy Real Questions (page: 48)

QUESTION: 73

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