CIMA F3 Exam With Confidence Using Practice Dumps

A listed company plans to raise $350 million to finance a major expansion programme.

The cash flow projections for the programme are subject to considerable variability.

Brief details of the programme have been public knowledge for a few weeks.

The directors are considering two financing options, either a rights issue at a 20% discount to current share price or a long term bond.

The following data is relevant:

The company's share price has fallen by 5% over the past 3 months compared with a fall in the market of 3% over the same period.

The directors favour the bond option.

However, the Chief Accountant has provided arguments for a rights issue.

Which TWO of the following arguments in favour of a right issue are correct?

A company's Board of Directors wishes to determine a range of values for its equity.

The following information is available:

Estimated net asset values (total asset less total liabilities including borrowings):

   • Net book value = $20 million

   • Net realisable value = $25 million

   • Free cash flows to equity = $3.5 million each year indefinitely, post-tax.

   • Cost of equity = 10%

   • Weighted Average Cost of Capital = 7%

Advise the Board on reasonable minimum and maximum values for the equity.

The table below shows the forecast for a company's next financial year:

The forecast incorporates the following assumptions:

   • 25% of operating costs are variable

   • Debt finance comprises a $400 million fixed rate loan at 5%

   • Corporate income tax is paid at 25%

The company plans to do the following next year from the forecast earnings on the assumption that earnings will be equivalent to free cash flow: 

   • Pay a total dividend of $20 million

   • Invest $40 million in new projects

What is the maximum % reduction in operating activity that could occur next year before the company's dividend and investment plans are affected?

Give your answer to the nearest 0.1%.