F3 Exam Dumps : Financial Strategy

Company X is an established, unquoted, specialist IT advisory firm with steady results, predictable dividends and cashflows. Company P is only buying 30% (a minority stake).

B. Dividend based using DVM – Very suitable because dividends are predictable and regular. For a minority stake, dividends are often the main measurable return, so a dividend valuation model is appropriate.

C. Cash based using free cash flow before interest – A DCF valuation based on free cash flow to the firm is also appropriate for a profitable, growing, going concern. You can value the whole business using FCFF and then take 30% of the equity value.

Asset-based (A) is less relevant for a specialist service company with relatively few tangible assets. P/E-based methods (D and E) are less ideal given there are few direct competitors, making comparables unreliable.

This requirement is a standard interest rate parity (IRP) application from CIMA F3 foreign exchange management. Where the spot rate is quoted as foreign currency per unit of home currency (here, A$ per PS, since 1 PS = 5 A$), CIMA F3 applies the parity relationship to forecast the exchange rate over the period using relative money-market interest rates. The forward/forecast rate is derived as:

Given:

p.a. (home deposits)

p.a. (foreign deposits)

PPP will receive A$5,000,000 in 3 months; converting at the forecast rate:

Rounded to the nearest thousand PS:

The bid is hostile and partly for diversification. Directors’ primary duty is to shareholders: they should explain why they believe the company is undervalued (e.g. unannounced plans and cash). Changing articles or using defensive payouts is poor governance; competition concerns are unlikely to be central here.

Answer: A. Write to shareholders explaining fully why the company's share price is undervalued.