CIMA F3 Exam With Confidence Using Practice Dumps

At the last financial year end, 31 December 20X1, a company reported:

The corporate income tax rate is 30% and the bank borrowings are subject to an interest cover covenant of 4 times. 

The results are presently comfortably within the interest cover covenant as they show interest cover of 8.3 times. The company plans to invest in a new product line which is not expected to affect profit in the first year but will require additional borrowings of $20 million at an annual interest rate of 10%.

What is the likely impact on the existing interest cover covenant?

ART manufactures traditional scooters. It has an equity beta of 1.4 and is financed entirely by equity. It plans to continue to be all-equity financed in future.

It is considering producing a range of electric scooters

GGG is a comparable quoted electric scooter manufacturer GGG has an equity beta of 2 4 reflecting its high level of gearing (the ratio of debt to equity is VI using market values).

The risk-free rate is 5%, and the market premium is 6%. The rate of corporation tax is 20%

What is the recommended discount rate that ART should use to assess the project to manufacture electric scooters?

Listed Company A has prepared a valuation of an unlisted company. Company B. to achieve vertical integration Company A is intending to acquire a controlling interest in the equity of Company B and therefore wants to value only the equity of Company B.

The assistant accountant of Company A has prepared the following valuation of Company B's equity using the dividend valuation model (DVM):

Where:

• S2 million is Company B's most recent dividend

• 5% is Company B's average dividend growth rate over the last 5 years

• 10% is a cost of equity calculated using the capital asset pricing model (CAPM), based on the industry average beta factor

Which THREE of the following are valid criticisms of the valuation of Company B's equity prepared by the assistant accountant?