CIMA F3 Workbook Q PDF.pdf

8/18/2019 CIMA F3 Workbook Q PDF.pdf

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CIMA F3 Workbook

Questions

F3 CIMA Questions www.mapitaccountancy.com

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Lecture 1

Financial Strategy






Shareholder Wealth - Illustration 1

Year Share Price Dividend Paid

2007 3.30 40c

2008 3.56 42c

2009 3.47 44c

2010 3.75 46c

2011 3.99 48c

There are 2 million shares in issue. Calculate the increase in shareholder wealth for each year:II. Per shareIII. As a percentageIV. For the business as a whole






EPS - Illustration 2

2010$‘000

2011$‘000

PBIT 2000 2100

Interest 200 300

Tax 300 400

Profit After Tax 1500 1400

Preference Dividend 300 400

Dividend 800 900

Retained Earnings 400 100

Share Capital (50c) 5000 5000

Reserves 3000 3100

Share Price $2.50 $2.80

Calculate the EPS for 2010 and 2011.






Lecture 2

PerformanceMeasurement






Performance Analysis Illustration

X1 X2 X3

Non Current Assets 500 700 1000

Current Assets 150 200 300

650 900 1300

Ordinary Shares ($1) 300 300 300

Reserves 100 280 430

Loan Notes 150 200 300

Payables 100 120 270

650 900 1300

Revenue 3000 3500 4200

COS 2000 2400 3200

Gross Profit 1000 1100 1000

Admin Costs 300 350 400

Distribution Costs 200 250 300

PBIT 500 500 300

Interest 100 150 220

Tax 120 90 50

Profit After Tax 280 260 30

Dividends 100 110 30

Retained Earnings 180 150 0

Share Price $3.30 $4.00 $2.20

Using the information calculate and comment on the following Ratios:

I. Return on Capital EmployedII. Return on EquityIII. Gross MarginIV. Net MarginV. Operating MarginVI. Revenue GrowthVII. GearingVIII. Interest Cover

IX. Dividend CoverX. Dividend YieldXI. P/E Ratio






Lecture 3

Finance Sources






Rights Issue - Illustration 1

XYZ Ltd. intends to raise capital via a rights issue.

The current share price is $8.

They are offering a 1 for 4 issue at a price of $6.

Calculate the Theoretical Ex-rights Price.

Rights Issue - Illustration 2

ABC Ltd. has decided to raise capital via a rights issue.

The share price is currently $5.50 and ABC intends to raise $5m.

There are currently 6.25m shares in issue and ABC is offering a 1 for 5 rights issue.

Calculate the Theoretical Ex-Rights Price.






Lecture 5Investment

Appraisal I






ARR - Illustration 1

ABC Ltd are considering expanding their internet cafe business by buying a businesswhich will cost $275,000 to buy and a further $175,000 to refurbish.

They expect the following cash to come in:

Year Net Cash Profits (£)

1 45,000

2 75,000

3 80,000

4 50,000

5 50,000

6 60,000

The equipment will be depreciated to a zero resale value over the same period and,after the sixth year, they can sell the business for $200,000

Calculate the ARR or ROCE of this investment






Relevant Cash Flow Criteria - Illustration 2

A business is considering investing in a new project. They have already spent $20,000 ona feasibility study which suggests that the project will be profitable.

The headquarters of the company has spare floor space which will be allocated to theproject with $7,000 of the current monthly rent allocated to the project.

New equipment costing $2.5m will have to be bought and will be depreciated on a straightline basis over 10 years.

A manager who earns $30,000 per year and currently runs a similar project will alsomanage the new project taking up 25% of his time.

State whether each of the following items are relevant cash flows and explain your answer.

I. The cost of the feasibility study.

II. The rent charged to the project.

III. The new equipment.

IV. The depreciation on the new equipment.

V. The Managers salary.






Payback Period - Illustration 3

Initial Investment of $5.8m.

Annual Cash Flows of $400,000.

Calculate the Payback Period.

Payback Period - Illustration 4

Initial Investment of $6.2m.

Cash Flows of:

Year 1: $1,200,000

Year 2: $2,200,000

Year 3: $2,500,000

Year 4: $1,700,000

Calculate the Payback Period.






Discounted Cash-flows - Illustration 5

An investor wants a real return of 10%. Inflation is 5%

What is the MONEY/NOMINAL rate required?


A company undertakes a project with the following cash-flows:

Year Cash-Flows

1 5,000

2 7,000

3 8,000

4 10,000

5 11,000

6 9,000

The company has a cost of capital of 10%.

Calculate the present value of the cash flows for each of the six years and in total.







A company undertakes a project with the following cash-flows:

Year Cash-Flows1 5,000

2 5,000

3 5,000

4 5,000

5 5,000

6 5,000

The company has a cost of capital of 10%.

Calculate the present value of the total cash flows for the six years


A company expects to receive $100,000 per year forever.

Their cost of capital is 10%.

Calculate the present value of the perpetuity.






Lecture 6

Investment Appraisal II






WDA - Illustration 1

A business buys a piece of equipment for $100.

Capital allowances are available at 25% reducing balance.

The tax rate is 30%

After the 4 year project the equipment can be sold for $25.

Working Capital - Illustration 2

A business requires the following working capital investment into a four year project:

Initial Investment: 30,000

Year 1 35,000

Year 2 45,000

Year 3 32,000

Show the working capital line in the NPV calculation.






NPV - Illustration 3

A business is evaluating a project for which the following information is relevant:

I. Sales will be $100,000 in the first year and are expected to increase by 5% per year.

II. Costs will be $50,000 and are expected to increase by 7% per year.

III. Capital investment will be $200,000 and attracts tax allowable depreciation of the fullvalue of the investment over the 5 year length of the project.

IV. The tax rate is 30% and tax is payable in the following year.

V. Working Capital invested will be 20% of projected sales for the following year.

VI. General inflation is expected to be 3% over the course of the project and the businessuses a real discount rate of 9%.

Calculate the NPV for the project.






Lecture 7 -

Investment Appraisal III






Illustration 1

ABC has evaluated a project and come to the following conclusions.

At a discount rate of 10% the NPV will be $100,000

At a discount rate of 15% the NPV will be -$75,000

What is the IRR?






Illustration 2

Initial Investment (5,000)

Period Cash Flows

1 2,000

2 (1,000)

3 3,500

4 3,800

Cost of Capital 10%

NPV = 1,216

IRR = 19%

Calculate the MIRR.






Lecture 8 - ForeignNPV






Illustration 1

Item costs $1,000

#/$ 1 : 2

However inflation in US is 5% and Eurozone 3%

Calculate the exchange rate in one years time.

Illustration 2 (i)

US Interest rate = 10%

UK Interest rate = 8%

Exchange rate = #/$ 1 : 2

Predict the exchange rate in 1 year

Illustration 2 (ii)

Current spot rate $/£ 1 : 1

The dollar is expected to strengthen by 7% per anum

Forecast the $:£ rate for the next 4 years.






Illustration 3

ABC Ltd. is a UK company intending to undertake a project in Foreignland where thecurrency is the Franc (FR).

ABC uses a discount rate of 10% to evaluate projects in the UK and the current spot rateis £ / FR 2.000.

The risk free rate of interest in Foreignland is 5% with the UK rate being 7%.

The initial investment in the project will be FR 400,000 with net cash inflows over a 5 yearproject of FR 150,000 per year.

Ignore Tax.

Calculate the NPV of the project.

Illustration 4









Illustration 5



Sterling is expected to appreciate against the Franc by 10% per year.

Illustration 6




The initial investment in the project will be FR 400,000 with net cash inflows over a 5 yearproject of FR 150,000 per year.

Ignore Tax.

Calculate the NPV of the project by adjusting the discount rate.






Lecture 9

WACC I






Cost of Equity using DVM - Illustration 1

ABC Company has just paid a dividend of 35c.

The current share price is $3.25.Calculate the Cost of Equity (Ke) using DVM.

Cost of Equity using DVM - Illustration 2

ABC Company has just paid a dividend of 35c.

The dividend paid has grown by 4% per year for the past 5 years.

The current share price is $3.25.

Calculate the Cost of Equity (Ke) using DVM.

Cost of Equity using CAPM - Illustration 3

Company A has a Beta of 1.2.

Government bonds are currently trading at 4%.

The average return than investors in the market can expect is 15%.

Calculate the Cost of Equity using CAPM.






Cost of Equity using CAPM - Illustration 4


Company B has a Beta of 1.Government bonds are currently trading at 5%.

The average return than investors in the market can expect is 12%.

Calculate the Cost of Equity using CAPM for each company.

Cost of Equity using CAPM Illustration 5


Company B has a Beta of 1.2.

Government bonds are currently trading at 5%.

The average market risk premium is 6%.

Calculate the Cost of Equity using CAPM for each company.






Lecture 10

WACC II






Irredeemable Debt - Illustration 1

A company has issued 10% irredeemable debt.

The market value of the debt is $90.The tax rate is 30%

Calculate the cost of debt (Kd).

Redeemable Debt - Illustration 2

A Company has issued debt which is redeemable in 5 years time.

Interest is payable at 8%.

The current market value of the debt is $102.

Ignore taxation.

Calculate the Cost of Debt (Kd).

Redeemable Debt - Illustration 3

A Company has issued debt which is redeemable in 5 years time.

Interest is payable at 10%.

The current market value of the debt is $104.

Tax is payable at 30%.







Convertible Debt - Illustration 4

A Company has issued debt which is convertible in 5 years time.

Interest is payable at 10%.The current market value of the debt is $120.

On conversion, investors will have a choice of either:

I. Cash at a 15% premium; or

II. 18 shares per loan note.

The current share price is $6 and it is expected to grow in value by 4% per year.

Tax is payable at 30%.


Preference Shares - Illustration 5

A company has issued 8% preference shares with a nominal value of $1.

The market value of the shares is 80c.

The tax rate is 30%.

Calculate the cost of the preference shares (Kd).






Bank Debt - Illustration 6

A company has a bank loan of $2m at an interest rate of 10%.

The tax rate is 30%.Calculate the cost of debt (Kd).

WACC - Illustration 7

Company A is funded as follows:

Item Capital Structure Cost

Equity 85% 15%

Debt 15% 7%

Calculate the Weighted Average Cost of Capital.








Balance Sheet Extract

Ordinary Shares (50c) 3000

Loan Notes 2000

Bank Loan 1000

The cost to the company of each of the above items has been calculated as:

Ordinary Shares 13%

Loan Notes 8%

Bank Loan 5%

The Loan notes are currently trading at $94.

The current share price is $1.50









Balance Sheet Extract

Ordinary Shares (50c) 2000

12% Loan Notes 1500

8% Preference Shares ($1) 500

Bank Loan 750

Details on these are as follows.

The company has an equity beta of 1.2. Government bonds are currently trading at 6%and the average market risk premium is 7%.

The Loan notes are currently trading at $106 and are redeemable at par in 5 years time.

The preference shares are trading at 92c.

The bank loan has an interest rate of 10%.

The current share price is $1.25.








Lecture 11

Capital Structure






Capital Structure - Illustration 1

A company has total capital of $1,000 with debt making up $300 and equity making up$700 of the total. The company’s cost of debt is 5% and cost of equity is 14%.

I. Calculate the company’s current WACC.II. Calculate the WACC if the company substitutes $200 of equity for $200 of debt

causing their cost of equity to rise to 16%.III. Calculate the WACC if the company substitutes $300 of equity for $300 of debt

causing their cost of equity to rise to 25%.






Lecture 12M & M Formulae






Illustration 1

ABC Ltd has a share price of 350c and 1m shares in issue. It currently has no debt.Current cost of capital is 13%.

The directors have decided to replace $2m of equity with 10% debt. The tax rate is 30%. Required

(i) Calculate the new value of the geared firm.

(ii)Calculate the value of the Equity in the geared firm.

Illustration 2

ABC Co. and CD Co. operate in the same industry and are identical in their ability togenerate cash flows.

ABC Co. is financed by Equity only of 3m shares with current value of $1 and has a cost ofequity calculated at 15%.

CD Co. has the same total capital but within it has irredeemable debt with a market valueof $0.9m.


Required

(i) Calculate the value of CD Co.

(ii)Calculate the value of the Equity in CD Co.






Illustration 3

ABC Co. and CD Co. operate in the same industry and are identical in their ability togenerate cash flows.


CD Co. has the same total capital but within it has irredeemable debt with a market valueof $0.9m and cost of debt of 8%.


Required

(i) Calculate the Cost of Equity for CD Co.

Illustration 4

ABC Co. and CD Co. operate in the same industry and are identical in their ability to

generate cash flows.


CD Co. has the same total capital but within it has irredeemable debt with a market valueof $0.9m and cost of debt of 8%.


Required

(i) Calculate the WACC for CD Co.






Lecture 13

Risk Adjusted WACC






Risk Adjusted WACC - Illustration 1

Company A intends to undertake a project in an unrelated industry.

The following details are relevant:

Item Company A Proxy Company

Equity Beta ($e) 1.2 1.4

Value of Equity 1000 800

Value of Debt 400 500

The risk free rate is 4%.

The average return on the market is 12%.

The post tax cost of debt is 7%.

Calculate the risk adjusted WACC to be used in evaluating the project.

Ignore Tax






Risk Adjusted WACC - Illustration 2

Company A intends to undertake a project in an unrelated industry.

The following details are relevant:

Item Company A Proxy Company

Equity Beta ($e) 1.1 1.3

Value of Equity 1200 900

Value of Debt 500 450

The risk free rate is 4%.

The average return on the market is 12%.


The post tax cost of debt is 8%.

Calculate the risk adjusted WACC to be used in evaluating the project.






Illustration 3

Company A Company B

Debt/Equity 1/3 1/4

Equity Beta

1.2Debt Beta 0.3

Assume that the Asset Beta and the Debt Beta of each firm is the same.

Calculate the Equity Beta for Company B.






Lecture 14

APV






Illustration 1

Cost of Equity in Geared Firm = 12%

Cost of Debt = 8%

Debt/Equity ratio = 1/2Tax rate = 30%

Calculate the cost of equity in an ungeared firm.

Illustration 2

Company AB has used $5m of 10% debentures to finance a project lasting for 4 years.The tax rate is 35%.

Issue costs are 3% and are tax deductible.

What is the PV of the issue costs for APV purposes?

Illustration 3


Issue costs are 3% and are tax deductible. These are to be raised along with the finance.

What is the PV of the issue costs for APV purposes?






Illustration 4


What is the PV of the tax relief available for APV purposes?

Illustration 5

Company AC needs to raise $10m in debt finance for 4 years.

Company AB has raised $7m of 10% debentures and the rest is provided by a subsidisedgovernment loan of $3m at 5%.


Calculate the financing effects of the debt for APV purposes.

Illustration 6

ABC Co. is considering a project which is expected to generate cash inflows of $500,000per year for 5 years and cost $500,000 of initial investment.

Costs have been estimated at $350,000 per year.

ABC has a current cost of equity of 14% and a cost of debt of 7% and a current debt to

equity ratio of 1/3.To undertake the the project the $500,000 will be raised through a bond issue of 8% withissue costs of 4% to be raised in addition to the finance.







Lecture 15

More Risk






Illustration 1

ABC Ltd is undertaking a project costing $900m with expected net cash flows of $400m inyears 1 & 2 then $600m in year 3.

The FD considers that these cash flows may be overestimated by as much as 10% in year

1, 15% in year 2 and 20% in year 3.

The risk free rate is 5%

Required

Using certainty equivalents calculate the expected NPV of the project.






Lecture 16

Further Appraisal






Expected Values - Illustration 1

A business is considering 2 different projects. The likely profit made from each project isoutlined below:

Proj ct A Proj ct B

Projected Profit PercentageLikely-hood

Projected Profit PercentageLikely-hood

$10,000 10% $10,000 15%

$15,000 30% $15,000 25%

$20,000 40% $20,000 30%

$23,000 20% $23,000 30%

Calculate the expected value for each of the projects.

Sensitivity Margin - Illustration 2

A business is considering a project which will cost them an initial 20,000

The sales expected for the 2 year duration are 20,000pa.

The variable costs are 2,000pa

Cost of capital 10%

Calculate the sensitivity margin of:

I. The initial investment.

II. The variable costs of the projects.

III. The sales of the project.






Lease V Buy - Illustration 3

Machine cost $10,000

The Machine has a useful economic life of 5 years with no scrap value

Capital allowances available at 25% reducing balance

Finance choices

1) 5 year loan 14.28% pre tax cost

2) 5 year Finance Lease @ $2,200 pa in advance

If the machine is purchased then maintenance costs of $100 per year will be incurred.


The leasing company will maintain the machine if it is leased.

Should the company lease or buy the machine.






Equivalent Annual Cost - Illustration 4

Machine Cost 30,000

Running costs

Year 1 10,000

Year 2 11,500

Residual Value (if sold after..)

Year 1 19,000

Year 2 16,000

Cost of capital = 10%

Is it better to replace the machine every year or to replace it every 2 years?






Lecture 17Further Appraisal II






Profitability Index - Illustration 1

A business has identified the following projects. They have $200,000 to invest and theprojects are divisible.

Project Investment NPV

A 90,000 15,000

B 110,000 25,000

C 50,000 10,000

D 75,000 22,000

E 70,000 -8,000

Which projects should the business undertake?






Investment Choices - Illustration 2

A business has identified the following projects. They have $200,000 to invest and theprojects are non-divisible.

Project Investment NPV

A 90,000 15,000

B 110,000 25,000

C 50,000 10,000

D 75,000 22,000

Which projects should the business undertake?

Equivalent Annual Annuity - Illustration 3

NPV Duration

Project 1 300 5 yrs

Project 2 200 3 yrs

Project 3 350 6 yrs

Calculate the EEA of each project given a cost of capital of 10%






Lecture18 Working Capital






Working Capital Illustration

Balance Sheet

$‘000

ASSETS

Non Current Assets 1000

Inventory 300

Receivables 200

Cash 300

1800

LIABILITIES

Ordinary Shares 800

Reserves 200

Long term Liabilities 700

Payables 100

Overdraft -

1800

Income Statement

$‘000

Revenue 1000

COS 800

Gross Profit 200

Other Costs 100

Net Profit 100

Other Information:

All sales are made on credit.

Required:

Calculate the Cash Operating Cycle for Inter Ltd.






Working Capital Illustration Part II

Show the journal entries and calculate the Revised Balance sheet if the operating cyclechanges to:

Item Days

Inventory Period 200

Collection Period 100

Less:

Payables Period 30

270






Working Capital Illustration Part III

Show the journal entries and calculate the Revised Balance sheet if the operating cyclechanges to:

Item Days

Inventory Period 90

Collection Period 30

Less:

Payables Period 60

60






Lecture 19

Business ValuationsI






Net Assets Valuation Method Illustration 1

Non Current Assets 550,000

Current Assets 170,000

Current Liabilities -80,000

Share Capital 300,000

Reserves 200,000

10% Loan Notes 150,000

The Market Value of property in the Non Curvalue.

rent Assets is $50,000 more than the book

The Loan Notes are redeemable at a 5% pr mium.

What is the value of a 70% holding using the net assets valuation basis?






DVM - Illustration 2

ABC pays a constant dividend of 45c. It has 3m ordinary shares.

The shareholders require a return of 15%.What is the Value of the business?

DVM - Illustration 3

A business has Share Capital made up of 50c shares of $3 millionDividend per share (just paid) 30cDividend paid four years ago 22c

Required Return = 12%

Calculate the Value of the business using the dividend valuation method.






P/E Ratio Method - Illustration 4

X1 X2 X3

$‘000 $‘000 $‘000

Revenue 3000 3500 4200

COS 2000 2400 3200




PBIT 500 500 300


Tax 120 90 50




Industry P/E Average 13 12 14

Calculate the Value of the Company for each of the 3 years using the P/E Ratiomethod.






P/E Ratio Method - Illustration 5

X1 X2 X3

$‘000 $‘000 $‘000

Revenue 3200 3800 4800

COS 2000 2400 3200




PBIT 700 800 900


Tax 120 90 50




Industry P/E Average 17 15 18

Number of Shares 3m 3m 3m

Calculate the Earnings Per Share for each of the 3 years

Calculate the Value of the Company for each of the 3 years using the EPS youcalculate.






Earnings Yield - Illustration 6

X1 X2 X3

$‘000 $‘000 $‘000

Revenue 3100 3700 4600

COS 2000 2400 3200




PBIT 600 700 700


Tax 120 90 50




Earnings Yield 0.15 0.18 0.17

Number of Shares 4m 4m 4m

Calculate the Earnings Per Share for each of the 3 years and the share price using theearnings yield.






Present Value of Future Cash Flows - Illustration 7

ABC Company earned $100,000 in cash inflows this year.

They expect this to increase in each of the next 5 years by 5% and after that to increaseby 2% forever.

The company uses a cost of capital of 10%.

Calculate the value of the company using the present value of future cash flows method.






Lecture19Business Valuations

I






Illustration 1

Company A has 100m shares at £3 each. Company B has 50m shares of £1 each.

Company A makes an offer of 1 new shares for every 5 held in B and has worked out

that the synergies available are valued at £20m

Calculate the expected value of a share in the combined company.

Illustration 2

Post Tax Profit P/E Ratio Pre Aq. ValueCompany A £150m 10 £1500mCompany B £10m 7 £70m Estimating the post acquisition value of the combined business is done by applying theP/E ratio of Company A to the combined earnings of the new combination.




Documents

CIMA F3 Workbook Q PDF.pdf