CIMA F3 Exam With Confidence Using Practice Dumps

An analyst has valued a company using the free cash flow valuation model.

The analyst used the following data in determining the value:

   • Estimated free cashflow in 1 year's time = $100,000

   • Estimated growth in free cashflow after the first year = 5% each year indefinitely

   • Appropriate cost of equity = 10% 

The result produced by the analyst was as follows:

Value of equity = $100,000 (1+0.05)/0.10 = $1,050,000

The analyst made a number of errors in determining the value. 

By how much has the analyst undervalued the company?

H Company has a fixed rate load at 10.0%, but wishes to swap to variable. It can borrow at LIBOR 8%.

The bank is currently quoting swap rates of 3.1% (bid) and 3.5% (ask).

What net rate will HHH Company pay if it enters into the swap?

WW is a quoted manufacturing company. The Finance Director has addressed the shareholders during WW's annual general meeting-She has told the shareholders that WW raised equity during the year and used the funds to repay a large loan that was maturing, thereby reducing WW's gearing ratio

At the conclusion of the Finance Director's speech one of the shareholders complained that it had been foolish for WW to have used equity to repay debt The shareholder argued that the Modigliani and Miller model (with tax) offers proof that debt is cheaper than equity when companies pay tax on their profits.

Which THREE arguments could the Finance Director have used in response to the shareholder?