Question 1

Company P is a large unlisted food-processing company.

Its current profit before interest and taxation is $4 million, which it expects to be maintainable in the future.

It has a $10 million long-term loan on which it pays interest of 10%.

Corporate tax is paid at the rate of 20%.

The following information on P/E multiples is available:

Which of the following is the best indication of the equity value of Company P?

Options :

A : $80 million

B : $40 million

C : $48 million

D : $24 million

Answer: D

Question 2

Company U has made a bid for the entire share capital of Company B.Company U is offering the shareholders in Company B the option of either a share exchange or a cashalternative.Advise the shareholders in Company B which THREE of the following would be considered disadvantages ofaccepting the cash consideration?

Options :

A : Cash consideration is certain whereas Company U-s future share price performance is uncertain.

B : Interest rates on deposit accounts are currently at a historic low and are expected to remain low.

C : Company U is not expected to change its dividend policy post-acquisition.

D : Taxation is payable on realised capital gains.

E : There will be no opportunity to participate in the future economic success of Company U.

Answer: A,B,D

Question 3

A listed company in a high technology industry has decided to value its intellectual capital using theCalculated Intangible Value method (CIV).Relevant data for the company: • Pays corporate income tax at 30% • Cost of equity is 9%, pre-tax cost of debt is 7% and the WACC is 8%• The value spread has been calculated as $26 millionCalculate the CIV for the company.

Options :

A : 228 million

B : 289 million

C : 531 million

D : 325 million

Answer: A

Question 4

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

Options :

A : Increase in customer base.

B : Competition authorities step in to stop a potential price monopoly.

C : Decrease in employee motivation due to internal changes.

D : Changes to supplier relationships owing to internal changes.

E : Cost savings from synergistic benefits and economies of scale.

Answer: A,C,D

Question 5

Company W has received an unwelcome takeover bid from Company B. The offer is a share exchange of 3

shares in Company B for 5 shares in Company W or a cash alternative of $5.70 for each Company W share.

Company B is approximately twice the size of Company W based on market capitalisation. Although the two

companies have some common business interested the main aim of the bid is diversification for Company B.

Company W has substantial cash balances which the directors were planning to use to fund an acquisition.

These plans have not been announced to the market.

The following share price information is relevant.

Which of the following would be the most appropriate action by Company W's directors following receipt of

this hostile bid?

Options :

A :

Change the Articles of Association to increase the percentage of shareholder votes required to approve a

takeover.

B : Refer the bid to the country-s competition authorities.

C : Write to shareholders explaining fully why the company-s share price is under valued.

D : Pay a one-off special dividend.

Answer: C

Free CIMAPRA19-F03-1-ENG Mock Exam – Practice Online Confidently

Buying Options: