CIMA CIMAPRA19-F03-1 Quiz 1 Topic 1 Questions 1-5

Question: 1

A company has announced a rights issue of 1 new share for every 4 existing shares.

Relevant data:

* Thecurrentmarketprice per shareis $10.00.

* Rights areto beissued at a 20% discount to the current price.

* The rate of return on the new funds raisedis expected tobe 10%.

* Therate of return on existing funds is5%.

What is the yield-adjustedtheoreticalex-rightsprice?

Give your answer totwodecimal places.

$?

A11.20, 11.2

B11.20, 11.3

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Question: 2

Which of the following would be a reason for a company to adopt a low dividend pay-out policy?

AHigh profitability

BA lack of alternative sources of finance

CA lack of investment opportunities

DUsing dividends to give a signal to the stock market

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Question: 3

Company H is considering thevaluation of an unlistedcompany which it hopes to acquire.

It has obtained thetarget company's financial statements.

Company Hhas been advised that the book value of net assets asshown inthe financial statementsof the target companydoes not provide a reliable indicator of their truevalue.

Advise the Board of Directors which of the following THREE statements aredisadvantagesof the net asset basis of valuation?

AThe net book value of assetsis merely a record of past transactions which complies with accounting conventions.

BThe net book value of assets can be obtained from the financial statements.

CIntangible assets are often notshown in the company's financial statements.

DThe net realisable value is usually differentfrom the net book value shown in the financial statements.

EThe net book value of current assets is normally a reliable indicator of their realisable value.

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Question: 4

Acompanyhas 8% convertible bonds in issue. The bonds are convertible in 3 years time at a ratio of 20 ordinary shares per $100 nominal value bond.

Each share:

* has a current market value of $5.60

* is expected to grow at 5% each year

What is the expected conversion valueof each$100nominal value bondin 3 years' time?

A$129.6

B$117.6

C$100.0

D$112.0

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Question: 5

Two companies that operate in the same industry have different Price/Earnings (P/E)ratios as follows:

Which of the following is the most likely explanation of the different P/E ratios?

ACompany B has a greater profit this year than Company A.

BCompany B has higherbusiness risk than Company A.

CCompany B has higher expected future growth than Company A.

DCompany B has higher gearing than Company A.

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CIMA CIMAPRA19-F03-1 Quiz:1 Topic:1 Questions:1-5