F3 Exam Dumps - Financial Strategy

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Question # 4

A company is currently all-equity financed with a cost of equity of 9%.

It plans to raise debt with a pre-tax cost of 3% in order to buy back equity shares.

After the buy-back, the debt-to-equity ratio at market values will be 1 to 2.

The corporate income tax rate is 25%.

Which of the following represents the company's cost of equity after the buy-back according to Modigliani and Miller's Theory of Capital Structure with taxes?

11.5%

18%

11.3%

90%

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Question # 5

A company intends to sell one of its business units. Company W, by a management buyout (MBO). A selling price of S200 million has been agreed.

The managers are discussing with a bank and a venture capital company (VCC) the following financing proposal.

The VCC requires a minimum return on its equity investment In the MBO of 35% a year on a compound basis over 5 years. What is the minimum total equity value of Company W in 5 years time in order to meet the VCC's required return? Give your answer to one decimal place.

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Question # 6

A product costs USD10 when purchased in the USA. The same product costs USD12 when it is purchased in the UK and the price in GBP is convened to USD.

Which of the following statement concerning purchasing power parity is correct?

Economic forces will bring the prices in the USA and UK into line.

The exchange rate between the USD and GBP will change so that tie price differential on this product (and at other products) is eliminated.

Economic forces should eliminate the price difference. but there could be market imperfections that permit it to persist.

This type of price deferential is a reliable baas for predicting currency movements

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Question # 7

An all equity financed company reported earnings for the year ending 31 December 20X1 of $8 million.

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

In the year ending 31 December 20X2 itÂ financed a project byÂ issuing a bondÂ with a $1 million nominal value and a coupon rate of 4%.

TheÂ company paysÂ corporate income taxÂ atÂ 20%.

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?

$6.69 million

$10.50 million

$8.40 million

$10.54 million

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Question # 8

A company is deciding whether to offer a scrip dividend or a cash dividend to its shareholders.Â

Although the company has excellent long-term growthÂ prospects, it is experiencing short-term profit and cash flow problems.

Which of the following statements is most likely to be a reason for choosing the scrip dividend?

It is a way of raising additional finance to promote future growth.

It is a way of increasing earnings per share.

It is a way of encouraging shareholders to allow cash to be retained in the business.