F3 Exam Dumps - Financial Strategy

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Question # 17

Which THREE of the following methods of business valuation would give a valuation of the equity of an entity, rather than the value of the whole entity?

Expected dividend in one year's time / (cost of equity - growth rate).

Total earnings x appropriate price-earnings ratio.

Forecast future cash flows to all Investors, discounted at the weighted average cost of capital.

Forecast future cash flows to equity, discounted at the cost of equity.

Non-current assets, plus current assets, minus current liabilities

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Question # 18

HospitalÂ XÂ provides free healthcare to all members of the community, funded by the central Government.

HospitalÂ YÂ provides healthcare which has to be paid for by the individual patients. It is a listed company, owned by a large number of shareholders.

Â In comparing the above two organisations and their objectives, which THREE of the following statements are correct?

X is a not-for-profit organisation while Y is a for-profit organisation.

X and Y have the same primary financialÂ objective - to maximise shareholder wealth.

The performance of X will be appraised primarily on the basis of value for money.

Only Y isÂ likely to have a mixture of financial and non-financial objectives.

X and Y will have the same primary non financialÂ objective - provision of quality of health care.

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Question # 19

A Venture Capital Fund currently holds a significant Â shareholding in a large private company as a result of funding a recent management buyout. It plans to exit this investment in 5 years time at a significant profit.

Which THREEÂ of the following exit mechanisms are most likely to be preferred by the Venture Capital Fund?

The management team agrees to buy back the Venture Capital Funds shareholding in 5 years time at its original cost.

The private company obtains a stock market listing on a recognised exchange within the next 5 years.

The Venture Capital Fund has an option to sell its shareholding to the company at twice its original cost which can be exercised in 5 years time.

The Venture Capital Fund has a legal entitlement to sell its shareholding to any third party investor if the company has not obtained a stock market listing within 5 years.

The management team has an option to buy the Venture Capital Fund's shares for their nominal value which can be exercised in 5 years time.Â

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Question # 20

The directors of a multinational group have decided to sell off a loss-making subsidiary and are considering the following methods of divestment:

1. Trade sale to an external buyer

2. A management buyout (MBO)

The MBO team and the external buyer have both offered the same price to the parent company for the subsidiary.

Which of the following is an advantage to the parent company of opting for a MBO compared to a trade sale as the preferred method of divestment?

Raise the cash more quickly.

Avoid a hostile reaction from key management.

Focus on the core competencies of the business

Retain the know edge of key management.

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Question # 21

A company is concerned about the interest rate that it will be required to pay on a planned bond issue.

It is considering issuing bonds with warrants attached.

Advise the directors which of the following statements about warrants is NOT correct?

Warrants are a debt sweetener attached to the bond to drive down the interest rate payable on the bond.

Warrants give the holder the right to buy ordinary shares in the company at a fixed price at a future date.

Warrants can be sold back to the issuing company for the nominal value of the share if no longer required by the bond holder.

Warrants can potentially be very expensive because they can involve the issue of shares at a discount in the future if exercised.

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Question # 22

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.

Â Â Â â€¢ Director A proposes aÂ discount of 25%Â

Â Â Â â€¢ Director B proposes aÂ discount of 30%

Which THREE of the following statements are most likely to be correct?

The theoretical ex-rights price will be higher under Director B's proposal than under Director A's proposal.

More shares will be issued under Director B's proposal than under Director A's proposal.

The rights issue price will be $3.00 under Director A's proposal.

The terms of the rights issue will be one new share for every two existing shares under Director A's proposal.

Shareholder wealth will be higher under Director A's proposal than under Director B's proposal.

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Question # 23

Which THREEÂ of the following are likely to be strategic reasons for a horizontal acquisition?

Reduction of risk by building a larger portfolio

Acquisition of an undervalued company

To achieve economies of scale

To secure key parts of the value chain

Reduction of competition

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Question # 24

A financial services company reported the following results in its most recent accounting period:

The company has an objective to achieve 5% earnings growth each year. The directors are discussing how this objective might be achieved next year.

Revenues have been flat over the last couple of years as the company has faced difficult trading conditions. Revenue is expected to stay constant in the coming year and so the directors are focussing efforts on reducing costs in an attempt to achieve earnings growth next year.

Interest costs will not change because the company's borrowings are subject to a fixed rate of interest.

What operating profit margin will the company have to achieve next year in order to just achieve its 5% earnings growth objective'?

55.8%

60.0%

58.0%

58.5%

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