Question 1

A listed company in a high growth industry, where innovation is a key driver of success has always operated a

residual dividend policy, resulting in volatility in dividends due to periodic significant investments in research

and development.

The company has recently come under pressure from some investors to change its dividend policy so that

shareholders receive a consistent growing dividend. In addition, they suggested that the company should use

more debt finance.

If the suggested change is made to the financial policies, which THREE of the following statements are true?

Options :

A : It may give a signal to the market that the company is entering a period of stable growth.

B : There may be a change to the shareholder profile due to 'the clientele effect'.

C : The directors will not have to take shareholder dividend preferences into consideration in future.

D : Retained earnings have a lower cost than debt finance.

E : The company-s financial risk will increase due to its increased use of debt finance.

Answer: A,B

Question 2

A company is undertaking a lease-or-buy evaluation, using the post-tax cost of bank borrowing as the discount

rate.

Details of the two alternatives are as follows:

Buy option:

• To be financed by a bank loan

• Tax depreciation allowances are available on a reducing-balance basis

• Assets depreciated on a straight-line basis

Lease option:

• Finance lease

• Maintenance to be paid by the lessee

• Tax relief available on interest payments and book depreciation

Which THREE of the following are relevant cashflows in the lease-or-buy appraisal?

Options :

A : Tax relief on tax depreciation allowances

B : Bank loan payments

C : Maintenance payments

D : Lease payments

E : Tax relief on the book depreciation

Answer: A,D

Question 3

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.

• Director A proposes a discount of 25%

• Director B proposes a discount of 30%

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

Options :

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

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

C : The rights issue price will be $3.00 under Director A-s proposal.

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

E : Shareholder wealth will be higher under Director A-s proposal than under Director B-s proposal.

Answer: B,C,D

Question 4

Company X is based in Country A, whose currency is the A$.

It trades with customers in Country B, whose currency is the B$.

Company X aims to maintain its revenue from exports to Country B at 25% of total revenue.

Company A has the following forecast revenue:

The forecast revenue from Country B has assumed an exchange rate of A$1/B$2, that is A$1 = B$2.

If the B$ depreciates against the A$ by 10%, the ratio of revenue generated from Country B as a percentage of

total revenue will:

Options :

A : fall to 23.3%.

B : rise to 27.0%.

C : rise to 30.3%.

D : fall to 22.7%.

Answer: A

Question 5

A company financed by equity and debt can be valued by discounting:

Options :

A : free cash flow before interest at WACC.

B : free cash flow before interest at the cost of equity.

C : free cash flow after interest at WACC.

D : free cash flow after interest at the cost of equity.

Answer: A

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

Buying Options: