Online Access Free F3 Practice Test

When valuing an unlisted company, a P/E ratio for a similar listed company may be used but adjustments to the P/E ratio may be necessary.
Which THREE of the following factors would justify a reduction in the proxy p/e ratio before use?

• A.The forecast earnings growth being relatively higher in the unlisted company.
• B.Unlisted companies being generally smaller and less established.
• C.The relative lack of marketability of unlisted company shares.
• D.A profit item within the unlisted company's latest earnings which will not reoccur.
• E.A lower level of scrutiny and regulation for unlisted companies.
• F.Control premium not being included within the proxy p/e ratio used.

Which THREE of the following statements are true of a money market hedge?

• A.They are easy to set up.
• B.They are more complex than forward contracts.
• C.They may be a little more flexible in comparison to a forward contract.
• D.They offer roughly the same outcome as a forward contract.
• E.They leave the company exposed to currency risks.

A listed company is planning a share repurchase.
The following data applies:
* There are 10 million shares in issue
* The share repurchase will involve buying back 20% of the shares at a price of $0.75
* The company is holding $2 million cash
* Earnings for the current year ended are $2 million
The Directors are concerned about the impact that this repurchase programme will have on the company's cash balance and current year earnings per share (EPS) ratio.
Advise the directors which of the following statements is correct?

• A.The cash balance will decrease by 75% and EPS will decrease by 25%.
• B.The cash balance will decrease by 20% and the EPS will decrease by 25%.
• C.The cash balance will decrease by 75% and EPS will increase by 25%.
• D.The cash balance will decrease by 20% and the EPS will increase by 25%.

A large, quoted company that is all-equity financed is planning to acquire a smaller unquoted company that is also all-equity financed.
The acquiring company's directors are using the dividend valuation model to value the target company before making an offer.
Relevant data for the target company:
* Dividends paid in the last financial year $2 million
* Book value of net assets $15 million
* Shares in issue 1 million
The acquiring company's cost of capital is 10%.
Its directors believe they can improve the target company's performance in the long term.
They estimate there will be no growth in the first year of the acquisition but from year 2 onwards there will be a 4% growth each year in perpetuity.
What is the maximum price the acquiring company should offer for each of the shares in the target company?

• A.$15.00
• B.$34.67
• C.$33.33
• D.$32.78

An unlisted company.
* Is owned by the original founders and members of their families
* Pays annual dividends each year depending on the cash requirements of the dominant shareholders.
* Has earnings that are highly sensitive to underlying economic conditions.
* Is a small business in a large Industry where there are listed companies with comparable capital structures Which of the following methods is likely to give the most accurate equity value for this unlisted company?

• A.P/E based valuation using the P/E of a similar company.
• B.Discounted cash flow analysis at WACC (based on cash flows after tax but before financing) plus the market value of debt.
• C.Dividend valuation model.
• D.Net asset valuation