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New CIMA Strategic F3 - Financial Strategy F3 Exam Practice Questions

Total 338 Questions

Last Updated On: 22-Nov-2024

Question # 1

F Co. is a large private company, the founder holds 60% of the company's share capital and her 2 children each hold 20% of the share capital. The company requires a large amount of long-term finance to pursue expansion opportunities, the finance is required within the next 3 months. The family has agreed that an Initial Public Offering (IPO) should not be pursued at this time, because it would take up to 12 months to arrange. The existing shareholders are currently considering raising the required finance from an established Venture Capitalist in the form of debt and equity. The Venture Capitalist has agreed to provide the required finance provided it can earn a return on investment of 25% per year. In addition, the Venture Capitalist requires 60% of the equity capital, a directorship in the company and a veto on all expenditure of a capital or revenue nature above a specified limit. From the perspective of the family, which of the following are advantages of raising the required finance from the Venture Capitalist? Select all that apply.
A. The cost of the finance under the Venture Capital investment.
B. The changes in shareholding as a result of the Venture Capital investment.
C. The veto on expenditure above a specified level of a revenue or capital nature.
D. The speed with which the finance can be obtained.
E. The experience of the Venture Capitalist with growing businesses.

The cost of the finance under the Venture Capital investment.

The veto on expenditure above a specified level of a revenue or capital nature.

Question # 2

A company is considering the issue of a convertible bond compared to a straight bond issue (non-convertible bond). Director A is concerned that issuing a convertible bond will upset the shareholders for the following reasons: • it will dilute their control • the interest payments will be higher therefore reducing liquidity • it will increase the gearing ratio therefore increasing financial risk Director B disagrees, and is preparing a board paper to promote the issue of the convertible bond rather than a non-convertible. Advise the Director B which THREE of the following statements should be included in his board paper to promote the issue of the convertible bond?
A. The convertible bond may not dilute control as the bond holder has an option to choose conversion.
B. The coupon rate on the convertible bond will be lower than that on a non-convertible bond.
C. When converted into shares, the company will receive a cash inflow which can be used for future investments.
D. Issuing a convertible bond will have a more favourable impact on the gearing ratio than a non-convertible bond.
E. Over the life of the bond, a convertible will be more expensive than a non-convertible.

The convertible bond may not dilute control as the bond holder has an option to choose
conversion.

The coupon rate on the convertible bond will be lower than that on a non-convertible
bond.

Issuing a convertible bond will have a more favourable impact on the gearing ratio than
a non-convertible bond.

Question # 3

On 31 October 20X3: • A company expected to agree a foreign currency transaction in January 20X4 for settlement on 31 March 20X4. • The company hedged the currency risk using a forward contract at nil cost for settlement on 31 March 20X4. • The transaction was correctly treated as a cash flow hedge in accordance with IAS 39 Financial Instruments: Recognition and Measurement. On 31 December 20X3, the financial year end, the fair value of the forward contract was $10,000 (asset). How should the increase in the fair value of the forward contract be treated within the financial statements for the year ended 31 December 20X3?
A. Not recognised in 20X3 as the forward contract is not settled until after the year end.
B. Not recognised in 20X3 as the gain will be offset by a loss on the hedged transaction.
C. A $10,000 profit will be recognised within the Income Statement.
D. A $10,000 profit will be recognised within other comprehensive income.

A $10,000 profit will be recognised within other comprehensive income.

Question # 4

A company is deciding whether to offer a scrip dividend or a cash dividend to its shareholders. Although the company has excellent long-term growth prospects, it is experiencing shortterm profit and cash flow problems. Which of the following statements is most likely to be a reason for choosing the scrip dividend?
A. It is a way of raising additional finance to promote future growth.
B. It is a way of increasing earnings per share.
C. It is a way of encouraging shareholders to allow cash to be retained in the business.
D. It is a way of increasing dividend per share.

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

Question # 5

Company A is planning to acquire Company B. Both companies are listed and are of similar size based on market capitalisation No approach has yet been made to Company B's shareholders as the directors of Company A are undecided about the most suitable method of financing the offer Two methods are under consideration a share exchange or a cash offer financed by debt. Company A currently has a gearing ratio (debt to debt plus equity) of 30% based on market values. The average gearing ratio (debt to debt plus equity) for the industry is 50% Although no formal offer has been made there have been market rumours of the proposed bid. which is seen as favorable to Company A. As a consequence. Company As share price has risen over the past few weeks while Company B's share price has fallen. Which THREE of the following statements are most likely to be correct?
A. Based on current share price movements, a share exchange would mean Company A has to issue fewer shares to acquire Company B than it would have done a few weeks ago
B. Company B's shareholders will be able to participate in the future growth of the combined business if it is a share exchange
C. The method of finance chosen will not affect the post-acquisition earning per share of the combined business
D. Company A's weighted average cost of capital will fall if financing is with debt
E. Company A's gearing will increase following a share exchange.

Based on current share price movements, a share exchange would mean Company A
has to issue fewer shares to acquire Company B than it would have done a few weeks ago

Company A's weighted average cost of capital will fall if financing is with debt

Question # 6

A company is based in Country Y whose functional currency is Y$. It has an investment in Country Z whose functional currency is Z$. This year the company expects to generate Z$ 10 million profit after tax. Tax Regime: • Corporate income tax rate in country Y is 50% • Corporate income tax rate in country Z is 20% • Full double tax relief is available Assume an exchange rate of Y$ 1 = Z$ 5. What is the expected profit after tax in Y$ if the Z$ profit is remitted to Country Y?
A. Y$ 1.25 million
B. Y$ 1.00 million
C. Y$ 31.25 million
D. Y$ 4.00 million

Y$ 1.25 million

Question # 7

Which THREE of the following are the most likely exit routes that apply to a venture capitalist?
A. Flotation via a stock market listing
B. Trade sale to another company
C. Selling back to the original owners
D. Liquidation of the company
E. Raising long term debt from the company

Flotation via a stock market listing

Trade sale to another company

Selling back to the original owners

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