CIMA F3 Exam With Confidence Using Practice Dumps

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?

At the last financial year end, 31 December 20X1, a company reported:

The corporate income tax rate is 30% and the bank borrowings are subject to an interest cover covenant of 4 times. 

The results are presently comfortably within the interest cover covenant as they show interest cover of 8.3 times. The company plans to invest in a new product line which is not expected to affect profit in the first year but will require additional borrowings of $20 million at an annual interest rate of 10%.

What is the likely impact on the existing interest cover covenant?

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?