CIMA CIMA Strategic level F3 New Questions

A company is considering whether to lease or buy an asset.

The following data applies:

   • The bank will charge interest at 7.14% per annum

   • The asset will cost $1 million

   • Tax-allowable depreciation is available on a straight line basis over 5 years

   • There is no residual value

   • Corporate tax is paid at 30% in the year when the profit is earned

What is the NPV of the buy option?

Give your answer to the nearest $000.

$ ?  

A company is owned by its five directors who want to sell the business.  

Current profit after tax is $750,000.  

The directors are currently paid minimal salaries, taking most of their incomes as dividends.

After the company is sold, directors' salaries will need to be increased by $50,000 each year in total.

A suitable Price/Earnings (P/E) ratio is 7, and the rate of corporate tax is 20%.

What is the value of the company using a P/E valuation?

Company ADE is an unlisted company; it needs to raise a significant amount of finance to fund future expansion. The directors are considering listing the company on the local stock exchange The following discussions have taken place between some of the directors:

Director A - We consider a public issue of bonds in the capital markets, we don't need to list to issue the bonds which will save time and money.

Director B - We should list on the Alternative Investment Market (AIM) and not the main market to avoid any regulatory requirements

Director C - We should remain unlisted; we can access an unlimited amount of equity finance through a rights issue

Director D - Listing will increase Company ADE's ability to raise new equity and debt finance in the future.

Director E - If we list, Company ADE will be a more likely target for a takeover than if we remain unlisted.

Which TWO of the directors' statements are correct?

Under traditional theory, an increase in a company's WACC would cause the value of the company to: