CIMA Exam CIMAPRA19-P03-1 Topic 3 Question 30 Discussion

Actual exam question for CIMA's CIMAPRA19-P03-1 exam

Question #: 30
Topic #: 3

RFG is considering a major expansion that will result in a more diversified business model.

At present, RFG's market capitalisation is $240 million. This is based on a beta of 1.6. The risk free rate is 4% and the market rate of return is 9%. RFG is financed entirely by equity. The company generates an annual cash surplus of $28.8 million.

The expansion will cost $50 million and will generate future cash flows of $12 million in perpetuity. This new business will reduce RFG's beta to 1.4.

Calculate the adjusted present value of the expansion.

A$81 million

B$131 million

C$321 million

D$59 million

Show Suggested Answer

Suggested Answer: A, B, D

by Roselle at Jul 29, 2023, 01:27 AM

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Jessenia

2 months ago

Okay, let's do this step-by-step. I've got my calculator ready to crunch the numbers. This is going to be a breeze, I can feel it!

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Kenny

1 months ago

Finally, we subtract the present value of the cost from the present value of the cash flows to get the adjusted present value.

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Johna

1 months ago

Next, we need to calculate the present value of the cost of the expansion.

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Erick

1 months ago

Let's start by calculating the present value of the cash flows from the expansion.

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Cecily

2 months ago

Haha, I bet the person who wrote this question is laughing at us right now. 'Perpetuity' and 'adjusted present value' - they're really trying to trip us up!

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Merilyn

2 months ago

User 2

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Felice

2 months ago

User 1

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Myra

2 months ago

D) $59 million? Really? That's way too low. This question is testing our understanding of adjusted present value, not our ability to guess random numbers.

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Kimbery

2 months ago

I believe the adjusted present value of the expansion will be around $131 million, so I choose option B.

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Lanie

2 months ago

I agree, reducing the beta and generating future cash flows will increase the company's value.

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Dong

2 months ago

I'm pretty sure the answer is B) $131 million. The expansion will generate $12 million in perpetuity, and with a lower beta of 1.4, the present value should be higher than the initial $50 million investment.

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