CIMA F3 Workbook Q PDF

F3 CIMA Questions! www.mapitaccountancy.
com
CIMA F3 Workbook
Questions
F3 CIMA Questions! www.mapitaccountancy.com
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 share
III. As a percentage
IV. For the business as a whole
EPS - Illustration 2
2010 2011
$‘000 $‘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
Performance
Measurement
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 Employed

II. Return on Equity
III. Gross Margin
IV. Net Margin
V. Operating Margin
VI. Revenue Growth
VII. Gearing
VIII. Interest Cover
IX. Dividend Cover
X. Dividend Yield
XI. 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 5
Investment
Appraisal I
ARR - Illustration 1
ABC Ltd are considering expanding their internet cafe business by buying a business
which 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 on
a feasibility study which suggests that the project will be profitable.
The headquarters of the company has spare floor space which will be allocated to the
project 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 straight
line basis over 10 years.
A manager who earns $30,000 per year and currently runs a similar project will also
manage 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-Flows
1 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 full
value 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 business
uses 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 - Foreign
NPV
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 the

currency is the Franc (FR).
ABC uses a discount rate of 10% to evaluate projects in the UK and the current spot rate
is £ / 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 year
project of FR 150,000 per year.
Ignore Tax.
Calculate the NPV of the project.
Illustration 4

is £ / FR 2.000.
Illustration 5

is £ / FR 2.000.
Sterling is expected to appreciate against the Franc by 10% per year.
Illustration 6

is £ / FR 2.000.
The initial investment in the project will be FR 400,000 with net cash inflows over a 5 year
project 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.
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.
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.
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.
Tax is payable at 30%.

Convertible Debt - Illustration 4
A Company has issued debt which is convertible in 5 years time.
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%.
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%.

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 12
M & 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 to
generate cash flows.
ABC Co. is financed by Equity only of 3m shares with current value of $1 and has a cost of
equity calculated at 15%.
CD Co. has the same total capital but within it has irredeemable debt with a market value
of $0.9m.
Required
(i) Calculate the value of CD Co.
(ii)Calculate the value of the Equity in CD Co.

Illustration 3
of $0.9m and cost of debt of 8%.
Required
(i) Calculate the Cost of Equity for CD Co.
Illustration 4
of $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 (βe) 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 (βe) 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 1.2
Debt 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 = 1/2
Tax 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.
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 subsidised
government 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 $500,000
per 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% with
issue 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 in
years 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 is
outlined below:
Project A Project B
Projected Profit Percentage Projected Profit Percentage

Likely-hood Likely-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 17
Further Appraisal II
Profitability Index - Illustration 1
A business has identified the following projects. They have $200,000 to invest and the
projects 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 the
projects 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 cycle
changes 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 cycle
changes to:
Item Days
Inventory Period 90
Collection Period 30
Less:
Payables Period 60
60
Lecture 19
Business Valuations
I
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 Current Assets is $50,000 more than the book
value.
The Loan Notes are redeemable at a 5% premium.

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 million

Dividend per share (just paid) 30c
Dividend 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 Ratio
method.
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 you
calculate.
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 the
earnings 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 increase
by 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.
Lecture19
Business 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. Value

Company A £150m 10 £1500m
Company B £10m 7 £70m

Estimating the post acquisition value of the combined business is done by applying the
P/E ratio of Company A to the combined earnings of the new combination.

CIMA F3 Workbook Q PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CIMA F3 Workbook Q PDF

Uploaded by

Copyright:

Available Formats

F3 CIMA Questions! www.mapitaccountancy.

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.

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.

Performance Analysis Illustration

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

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 Employed

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.

Calculate the Theoretical Ex-Rights Price.

They expect the following cash to come in:

Year Net Cash Profits (£)

Calculate the ARR or ROCE of this investment

Relevant Cash Flow Criteria - Illustration 2

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.