Question 1

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?

Options :

A : A company in a similar market to Company A.

B : A pottery factory in the Middle East.

C : A company that produces accessories.

D : A listed international logistics firm.

Answer: D

Question 2

Company A needs to raise AS500 mi lion to invest in a new project and is considering using a pub ic issue of

bonds to finance the investment.

Which THREE of the following statements-relating to this bond issue are true?

Options :

A : A company must be listed before it can issue bones.

B : The largest issuer of bond i3 the government.

C : Purchasing bonds in the capital markets enables entities to borrow large amounts of finance.

D : The bond market is unregulated making it easier to raise finance

E : Bonds issues in the corporate debt market are underwritten.

Answer: A,B,C

Question 3

The directors of a financial services company need to calculate a valuation of their company’s equity in

preparation for an upcoming initial Public Offering (IPO) of shares. At a recent board meeting they discussed

the various methods of business valuation.

The Chief Executive suggested using a Price-earing (P./E) method of valuation, but the finance Director

argued that a valuation based on forecast cash flows to equity would be more appropriate.

Which THREE of the following are advantages of valuation based on forecast cash flows to equity, compared

to a valuating using a price earnings methods?

Options :

A : Using cash is theoretically superior to using profits in a valuation calculation.

B : It give on estimate of the likely shareholder value that will be created.

C : The calculations are much simpler.

D : It incorporates the time value of money.

E : It avoids the problem of having to forecast a sustainable level of future growth.

Answer: A,C,D

Question 4

Z wishes to borrow at a floating rate and has been told that it can use swaps to reduce the effective interest rate

it pays. Z can borrow floating at Libor ' 1, and fixed at 10%.

Which of the following companies would be the most appropriate for Z to enter into a swap with?

Options :

A : Company A - it can borrow floating L +1 ½ and fixed at 9.5%

B : Company D - it can borrow at L +1 ½ and fixed at 10.5%

C : Company C - it can borrow at L +1 ½ and fixed at 9%

D : Company E - it can borrow floating at L +1 ½ and fixed at 12%

Answer: C

Question 5

A company has accumulated a significant amount of excess cash which is not required for investment for the

foreseeable future.

It is currently on deposit, earning negligible returns.

The Board of Directors is considering returning this excess cash to shareholders using a share repurchase

programme.

The majority of shareholders are individuals with small shareholdings.

Which THREE of the following are advantages of the company undertaking a share repurchase programme?

Options :

A : Individual shareholders can realise their investment if they wish.

B : The earnings per share should increase for the shareholders who do not sell their shares.

C : It reduces excess cash which might have been attractive to predators.

D : It reduces the amount of cash for potential future investment opportunities.

E : Institutional investors generally prefer a constant predictable income in the form of dividends.

Answer: A,B,C

Free CIMAPRO19-F03-1-ENG Mock Exam – Practice Online Confidently

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