Legit F3 Exam Download

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Question 52

BBA is a wholly owned subsidiary of AAB BBA operates in country B where the currency is the B$.

The following is an extract from BBA's financial statements at 31 December 20X1:

The following Information is relevant:

" The bonds were trading at $110 per $100 on 31 December 20X1. "Operating profit of BBA for the year ended 31 December 20X1 was S15 million

• The P/E ratio is 8

* Corporate income tax rate is 20%.

The tax authorities m country B Implemented thin capitalisation rules based on the level of gearing of the subsidiary, calculated as book value o( debt lo book value of equity The cut-off point for gearing used by the tax authorities for a company to be thinly capitalised is 75%.

Which of the following statements is correct as at 31 December 20X1?

Options:

Gearing Is 71.43%. thin capitalisation rules are not breached

Gearing is 250%. thin capitalisation rules are breached

Gearing is 83.33%. thin capitalisation rules are breached

Gearing is 83.33%. thin capitalisation rules are not breached

Question 53

Which of the following statements about the tax impact on debt finance is correct?

Options:

Debt instruments issued with fixed and floating charges do not attract tax relief on interest paid.

Preference share dividends attract tax relief in the same way as debenture interest.

Interest on debt is deducted from post-tax profits.

Interest on debt is deducted from pre-tax profits.

Question 54

Which THREE of the following are likely to be strategic reasons for a horizontal acquisition?

Options:

Reduction of risk by building a larger portfolio

Acquisition of an undervalued company

To achieve economies of scale

To secure key parts of the value chain

Reduction of competition

Question 55

Company AAB is located in Country A with the A$ as its functional currency It plans to grow by acquisition and has identified Company BBA as a potential takeover candidate Company BBA is located in Country B with the BS as its functional currency.

The directors of Company AAB are concerned about foreign currency risk if the acquisition goes ahead

Which of the following will be most effective in reducing Company AAB's exposure to translation risk if the acquisition is successful1?