Question 1

An entity prepares financial statements to 31 December each year. The following data applies:

1 December 20X0

• The entity purchased some inventory for $400,000.

• In order to protect the inventory against adverse changes in fair value the entity entered into a futures

contract to sell the inventory for a fixed price on 31 January 20X1.

• The entity designated this contract as a fair value hedge of the value of the inventory.

31 December 20X0

• The inventory had a fair value of $480,000 and the futures contract had a fair value of $75,000 (a financial

liability).

What will be the impact on the statement of profit or loss and other comprehensive income for the year ended

31 December 20X0 in respect of the change in the value of the inventory and the futures contract?

Options :

A : A loss of $75,000 will be recognised in profit or loss.

B : A loss of $75,000 will be recognised in other comprehensive income.

C : A net gain of $5,000 will be recognised in profit or loss.

D : A net gain of $5,000 will be recognised in other comprehensive income.

Answer: C

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

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 4

A company has a cash surplus which it wishes to distribute to shareholders by a share repurchase rather than

paying a special dividend.

Which THREE of the following statements are correct?

Options :

A : The payment of a special dividend could raise shareholders' expectations of similar distributions in the future, unlike a share repurchase.

B : The share repurchase could send a negative signal to shareholders as it could be interpreted as a failure of management to find suitable investment opportunities

C : Determination of the repurchase price will be easy as shareholders will insist on receiving the open market price

D : Different tax regimes could result in shareholders having a preference for a share repurchase due to the often more preferential tax treatment of capital gains.

E : The share repurchase, if approved by the shareholders, will be binding on all of the company's shareholders.

Answer: A,B,D

Question 5

A company is funded by:

• $40 million of debt (market value)

• $60 million of equity (market value)

The company plans to:

• Issue a bond and use the funds raised to buy back shares at their current market value.

• Structure the deal so that the market value of debt becomes equal to the market value of equity.

According to Modigliani and Miller's theory with tax and assuming a corporate income tax rate of 20%, this

plan would:

Options :

A : increase the company-s asset beta.

B : decrease the company-s equity beta.

C : increase shareholder wealth.

D : increase the market value of the company-s equity.

Answer: C

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

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