CIMA Exam CIMAPRA19-F03-1 Topic 3 Question 107 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam

Question #: 107
Topic #: 3

Company A operates in country A and uses currency AS. It is looking to acquire Company B which operates in country B and uses currency B$. The following information is relevant:

The assistant accountant at Company A has prepared the following valuation of company B's equity, however there are some errors in his calculations.

Value of Company B's equity = 14.16 + 16.03 + 17.67 = AS47.86 million

Company B has BS5 million of debt finance.

Which of the following THREE statements are true?

AThe conversion into AS is incorrect as the assistant accountant should have divided by the exchange rate and not multiplied.

BCash flow to all investors should be discounted at Company B's cost of equity of 10% rather than its WACC of 8%.

CThe valuation is understated because forecast cash flows beyond year 3 have been ignored.

DThe forecast exchange rates are incorrect as they show the BS strengthening and it should be weakening.

EThe calculations show Company B's entity value, not its equity value.

Show Suggested Answer

Suggested Answer: A, B, C

by Kassandra at Mar 03, 2025, 11:23 PM

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Lonna

4 months ago

This question is a real head-scratcher. It's like trying to assemble IKEA furniture without the instructions.

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Raul

3 months ago

C) The valuation is understated because forecast cash flows beyond year 3 have been ignored.

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Talia

3 months ago

B) Cash flow to all investors should be discounted at Company B's cost of equity of 10% rather than its WACC of 8%.

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Daren

3 months ago

A) The conversion into AS is incorrect as the assistant accountant should have divided by the exchange rate and not multiplied.

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Ryan

4 months ago

Forecast exchange rates showing the BS strengthening? That's like predicting the weather in the Sahara will be snowy next week.

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Kate

2 months ago

Yeah, it's important to consider all factors when valuing a company's equity.

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Ivory

3 months ago

I think option A is correct, the assistant accountant should have divided by the exchange rate.

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Erick

3 months ago

I agree, forecasting exchange rates can be quite unpredictable.

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Ramonita

4 months ago

Ignoring the cash flows beyond year 3? That's like trying to plan a road trip without considering the whole journey, just the first few miles.

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Jacquline

2 months ago

C) The valuation is understated because forecast cash flows beyond year 3 have been ignored.

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Gladys

2 months ago

B) Cash flow to all investors should be discounted at Company B's cost of equity of 10% rather than its WACC of 8%.

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Moon

3 months ago

A) The conversion into AS is incorrect as the assistant accountant should have divided by the exchange rate and not multiplied.

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Edna

4 months ago

I believe statement C is also true. Ignoring forecast cash flows beyond year 3 would definitely understate the valuation.

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Jutta

4 months ago

I agree with Jerry. Statement A is correct as the exchange rate should have been divided, not multiplied.

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Hillary

4 months ago

Discounting the cash flows at the cost of equity instead of the WACC? That's like trying to calculate the fuel efficiency of a car using the engine's horsepower instead of the overall vehicle weight.

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Geoffrey

4 months ago

It's important to consider all relevant factors when valuing a company's equity, including the appropriate discount rate.

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Earleen

4 months ago

The assistant accountant really needs to brush up on their exchange rate conversions. Multiplying by the rate instead of dividing? That's like trying to pay for a $5 coffee with a $50 bill.

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Jerry

4 months ago

I think statement A is true because the assistant accountant made a mistake in the conversion.

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