CIMA Exam CIMAPRA19-F03-1 Topic 4 Question 99 Discussion

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

Question #: 99
Topic #: 4

DFG is a successful company and its shares are listed on a recognised stock exchange. The company's gearing ratio is currently in line with the industry average and the directors of DFG do not want to increase the company's financial risk. The company does not carry a large cash balance and its shareholders are not expected to be willing to support a rights issue at this time

LMB is a small services company owned and managed by a small board of directors who are going to retire within the next year

DFG wishes to purchase LMB and has approached LMB's owners, who are broadly open to the proposal, to discuss the bid and the consideration to be offered by DFG. LMB's owners explain to DFG that they are also keen to defer any tax liabilities they would be subject to on receipt of the consideration.

Based on the information provided, which of the following types of consideration would be most suitable to finance the acquisition?

ALoan stock in DFG for the current value of LMB

BDFG shares for the current value of LMB

CCash for the current value of LMB

DDFG shares for a percentage of the current value of LMB plus a three year earn-out arrangement

Show Suggested Answer

Suggested Answer: C, D, E

by Mabel at Sep 16, 2024, 06:01 PM

Limited Time Offer

25%

Off

Get Premium CIMAPRA19-F03-1 Questions as Interactive Web-Based Practice Test or PDF

Contribute your Thoughts:

Submit Cancel

Aileen

1 months ago

Option E: Pay the LMB owners in DFG's secret stash of Beanie Babies. It's a win-win - they get to defer taxes, and DFG gets to finally unload those things.

upvoted 0 times

Pauline

1 days ago

Yes, that option would allow LMB's owners to defer tax liabilities and also align their interests with the future performance of the combined company.

upvoted 0 times

...

Avery

16 days ago

I think DFG shares for a percentage of the current value of LMB plus a three year earn-out arrangement could be a good compromise.

upvoted 0 times

...

Emelda

27 days ago

I agree, we need to consider options that are more aligned with the financial goals of both companies.

upvoted 0 times

...

Kenda

1 months ago

That's a creative idea, but I don't think Beanie Babies would be a suitable form of consideration for this acquisition.

upvoted 0 times

...

Leota

1 months ago

Option D all the way! Cash, shares, and an earn-out - it's like a corporate version of a gold, frankincense, and myrrh combo. The LMB owners will be dancing in the streets.

upvoted 0 times

...

Jacquline

2 months ago

If I were the DFG directors, I'd be a bit wary of option B. Giving away too much equity in the company could dilute the existing shareholders. Option D seems like a good compromise.

upvoted 0 times

Tamra

21 days ago

Option D does seem like a good compromise to keep everyone happy.

upvoted 0 times

...

Mitzie

28 days ago

I agree, diluting existing shareholders could be risky.

upvoted 0 times

...

Sanda

2 months ago

Option C seems the most straightforward, but it might not be the best fit for LMB's owners' tax deferral needs. I'd go with option D to balance the cash consideration with the share component.

upvoted 0 times

Mammie

1 months ago

True, the earn-out arrangement in option D could be beneficial for both parties in the long run.

upvoted 0 times

...

Alfred

1 months ago

Loan stock in DFG for the current value of LMB could also be a good option to consider.

upvoted 0 times

...

Tegan

1 months ago

I agree, option D would provide a good balance between cash and shares for LMB's owners.

upvoted 0 times

...

Denny

1 months ago

Option C seems the most straightforward, but it might not be the best fit for LMB's owners' tax deferral needs.

upvoted 0 times

...

Deangelo

2 months ago

I think option D is the best choice here. The owners of LMB can defer their tax liabilities by receiving a portion of the consideration in DFG shares, and the earn-out arrangement provides an incentive for them to ensure a smooth transition and continued success of the business.

upvoted 0 times

...