Important CIMAPRA19-F03-1 Exam Questions

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?

Modigliani and Miller are the main proponents of the view that the dividend policy is irrelevant to the value of a company's shares.

They argue that a company that continually reinvests its entire earnings would generate the same shareholder wealth if it engaged in a policy of high dividends and financed its expansion with funds obtained from rights issues.

Which THREE of the followingstatementsare assumptions that are required in order to support thisproposition?

Two listed companies in the same industryare joining together through a merger.

What are the likely outcomes that will occurafter the merger has happened?

Select ALL that apply.

A company plans to raise $12 millionto finance an expansion project using a rights issue.

Relevant data:

* Shares will be offered at a 20% discountto the present market price of $15.00 per share.

* There are currently 2 million shares in issue.

* The project is forecast to yield a positive NPV of $6 million.

What is the yield-adjusted Theoretical Ex-Rights Price following the announcement of the rights issue?

A company's dividend policyis topay out 50% of its earnings.

Its most recent earnings per share was $0.50, and it has just paid a dividend per share of $0.25.

Currently, dividends are forecast to grow at 2% each year in perpetuity and the cost of equity is 10.5%.

In order to grow its earnings and dividends, the company is considering undertaking a new investment funded entirely by debt finance. If the investment is undertaken:

* Its cost of equity will immediately increase to 12% due to the increased finance risk.

* Its earnings and dividends will immediately commence growing at 4% each year in perpetuity.

Which of the following is the expected percentage change in the share price if the new investment is undertaken?