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

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 millionCompany B has BS5 million of debt finance.Which of the following THREE statements are true?
A) The conversion into AS is incorrect as the assistant accountant should have divided by the exchange rate and not multiplied. and B) Cash flow to all investors should be discounted at Company B's cost of equity of 10% rather than its WACC of 8%. and C) The valuation is understated because forecast cash flows beyond year 3 have been ignored.
D) The forecast exchange rates are incorrect as they show the BS strengthening and it should be weakening.
E) The calculations show Company B's entity value, not its equity value.

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

Actual exam question for CIMA's CIMAPRA19-F03-1 exam
Question #: 107
Topic #: 3
[All CIMAPRA19-F03-1 Questions]

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?

Show Suggested Answer Hide Answer
Suggested Answer: A, B, C

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

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Bernardo
8 months ago
I’m surprised they didn’t account for the debt in the equity valuation.
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Annita
8 months ago
Totally agree, cash flows should be discounted at the cost of equity!
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Ena
8 months ago
Wait, are they really using a WACC of 8%? That seems off.
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Mignon
8 months ago
I think the conversion method is wrong too, should divide not multiply.
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Nobuko
9 months ago
The valuation is definitely understated, they ignored future cash flows!
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Rene
9 months ago
I vaguely remember discussing how entity value differs from equity value in class, so maybe that's what the calculations are showing here.
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Alesia
9 months ago
I feel like the valuation might be missing some future cash flows, but I can't recall the exact details on how that affects the overall value.
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Lorita
9 months ago
I think I saw a similar question where we had to discount cash flows at WACC instead of cost of equity. This might be the same case here.
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Susana
9 months ago
I remember something about currency conversion, but I'm not sure if it's about dividing or multiplying by the exchange rate.
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Lai
9 months ago
This is a classic M&A valuation question. I feel confident I can identify the errors and select the correct statements. I'll just need to be careful with the calculations and currency conversions.
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Lindy
9 months ago
I've seen questions like this before, so I think I have a good handle on the approach. I'll methodically go through each statement and evaluate whether it's true or false based on the information given.
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Lino
9 months ago
Hmm, I'm a bit confused by the different currencies and the valuation approach. I'll need to make sure I understand the concepts of entity value versus equity value before attempting to answer.
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Viola
9 months ago
Okay, the key seems to be identifying the errors in the assistant accountant's calculations. I'll need to double-check the exchange rate usage, discount rate, and whether the forecast cash flows are complete.
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Rosio
10 months ago
This question looks tricky with the currency conversion and valuation calculations. I'll need to carefully review the information provided and think through each step.
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Lonna
1 year ago
This question is a real head-scratcher. It's like trying to assemble IKEA furniture without the instructions.
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Raul
1 year ago
C) The valuation is understated because forecast cash flows beyond year 3 have been ignored.
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Talia
1 year 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
1 year 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
1 year 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
1 year ago
Yeah, it's important to consider all factors when valuing a company's equity.
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Ivory
1 year ago
I think option A is correct, the assistant accountant should have divided by the exchange rate.
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Erick
1 year ago
I agree, forecasting exchange rates can be quite unpredictable.
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Ramonita
1 year 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
1 year ago
C) The valuation is understated because forecast cash flows beyond year 3 have been ignored.
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Gladys
1 year 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
1 year 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
1 year 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
1 year ago
I agree with Jerry. Statement A is correct as the exchange rate should have been divided, not multiplied.
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Hillary
1 year 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
1 year 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
1 year 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
1 year ago
I think statement A is true because the assistant accountant made a mistake in the conversion.
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