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CIMAPRA19-F03-1 Exam - Topic 4 Question 126 Discussion

It is now 1 January 20X0.Company V, a private equity company, is considering the acquisition of 40% of the equity of Company A for a total amount of $15 million.Company A has been established to develop a new type of engine which will be launched at the end of 20X1. Company A is forecasting that the new engine will result in free cash flows to equity of $2m in its first year of operation and that this will rise by 8% per year for the foreseeable future. The new engine is the only commercial activity that Company A is involved in.Company V intends to sell its stake in Company A when the new engine is launched.Company A has a cost of equity of 12%.Assuming that Company V receives an amount that reflects the present value of their shares in company
B) 10%
A) what is the estimated annual rate of return to Company V from this investment? (To the nearest %)
A) 3%
C) 16%
D) 33%

CIMAPRA19-F03-1 Exam - Topic 4 Question 126 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam
Question #: 126
Topic #: 4
[All CIMAPRA19-F03-1 Questions]

It is now 1 January 20X0.

Company V, a private equity company, is considering the acquisition of 40% of the equity of Company A for a total amount of $15 million.

Company A has been established to develop a new type of engine which will be launched at the end of 20X1. Company A is forecasting that the new engine will result in free cash flows to equity of $2m in its first year of operation and that this will rise by 8% per year for the foreseeable future. The new engine is the only commercial activity that Company A is involved in.

Company V intends to sell its stake in Company A when the new engine is launched.

Company A has a cost of equity of 12%.

Assuming that Company V receives an amount that reflects the present value of their shares in company

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Suggested Answer: B

by Keva at May 29, 2026, 01:06 PM

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Nikita
10 hours ago
True, that could push it higher.
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Dusti
6 days ago
But the growth rate is 8%.
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Reyes
11 days ago
10% seems reasonable.
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Venita
16 days ago
I feel like 16% is too high.
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Nikita
21 days ago
I think it's about future cash flows.
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Dusti
26 days ago
This question is tricky.
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Antonio
1 month ago
10% feels like a safe bet given the cost of equity.
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Gilberto
1 month ago
Wait, how can they expect such a high return with just 40%?
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Una
1 month ago
33% seems way too high for this investment!
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Anastacia
2 months ago
I think the return is closer to 16%.
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Angelica
2 months ago
The cash flows start at $2m and grow by 8% annually.
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Carolann
2 months ago
Based on the cash flows and the growth rate, I think the return could be quite high, maybe even 33%. But I need to double-check the calculations.
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Nydia
2 months ago
I feel like I’ve seen a question like this before where we had to factor in the growth rate of cash flows. Could it be closer to 16%?
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Shawana
2 months ago
I think the return might be around 10% since the cost of equity is 12%, but I’m not entirely confident about how to adjust for the growth rate.
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Paola
2 months ago
I remember we practiced similar questions on equity valuation, but I'm not sure how to calculate the return based on the cash flows.
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