100% Free CIMA CIMAPRO19-F03-1-ENG Practice Test Questions

Question 1

A company has a cash surplus which it wishes to distribute to shareholders by a share repurchase rather than

paying a special dividend.

Which THREE of the following statements are correct?

A : The payment of a special dividend could raise shareholders' expectations of similar distributions in the future, unlike a share repurchase.

B : The share repurchase could send a negative signal to shareholders as it could be interpreted as a failure of management to find suitable investment opportunities

C : Determination of the repurchase price will be easy as shareholders will insist on receiving the open market price

D : Different tax regimes could result in shareholders having a preference for a share repurchase due to the often more preferential tax treatment of capital gains.

E : The share repurchase, if approved by the shareholders, will be binding on all of the company's shareholders.

Answer: A,B,D

Question 2

A company has:

• 10 million $1 ordinary shares in issue

• A current share price of $5.00 a share

• A WACC of 15%

The company holds $10 million in cash. No interest is earned on this cash.

It will invest this in a project with an expected NPV of $4 million.

In a semi-strong efficient stock market, which of the following is the most likely share price immediately after

the announcement of the new investment?

A : $5.40

B : $6.40

C : $6.80

D : $5.30

Answer: A

Question 3

Z wishes to borrow at a floating rate and has been told that it can use swaps to reduce the effective interest rate

it pays. Z can borrow floating at Libor ' 1, and fixed at 10%.

Which of the following companies would be the most appropriate for Z to enter into a swap with?

A : Company A - it can borrow floating L +1 ½ and fixed at 9.5%

B : Company D - it can borrow at L +1 ½ and fixed at 10.5%

C : Company C - it can borrow at L +1 ½ and fixed at 9%

D : Company E - it can borrow floating at L +1 ½ and fixed at 12%

Answer: C

Question 4

Company C is a listed company. It is currently considering the acquisition of Company D. The original

founder of Company C currently owns 52% of the shares.

Alternative forms of consideration for Company D being considered are as follows:

• Cash payment, financed by new borrowing

• issue of new shares in Company C

Which of the following is an advantage of a cash offer over a share-for exchange from the viewpoint of the

original founder of Company C?

A : A share for share exchange would result in a significant change in control of Company C whereas a cash offer would not

B : A share-for-share exchange would require the approval shareholders in Company C but a cash offer would not.

C : A share-for-share exchange would require the approval of the Competition Authorities but a cash offer would not.

D : A cash offer would result in a lower gearing ratio therefore reduce the weighted overage cost of capital whereas a cash offer would not

Answer: A

Question 5

A company is concerned that a high proportion of its debt portfolio consists of variable rate finance with an

interest rate of LIBOR ' 1 .0%.

It is considering using an interest rate swap to reduce interest rate risk out is concerned about additional

finance cost this might create.

A bank has quoted swap rates of 3% 3.5% against LIBOR.

Is an interest rate swap likely to be beneficial to the company at current LIBOR rates?

A : No, because it would be cheaper to repay variable rate finance aid enter into new fixed rate finance than to enter into an interest rate swap

B : Yes, because it will have lower interest rate risk and interest cost remains the same.

C : Yes, because interest cost will decrease with the interest rate swap in place.

D : No, because interest cost will increase with the interest rate swap in place.

Answer: B

Free Practice CIMA CIMAPRO19-F03-1-ENG Exam Questions 2025