Pass the CIMA Strategic F3 Questions and answers with Dumpstech

We want methods that give the value of equity, not the value of the whole entity.

A. D₁ / (kₑ – g) → Gordon growth dividend model = value of equity (share value). ✅

B. Total earnings × P/E → market capitalisation = equity value. ✅

C. Free cash flows to all investors discounted at WACC → enterprise / firm value (equity + debt). ❌

D. Free cash flows to equity discounted at cost of equity → equity value. ✅

E. NCA + CA − CL → value of net assets before deducting long-term debt, i.e. value of the business to all capital providers, not just equity. ❌

So correct choices: A, B, D.

In semi-strong form market efficiency, share prices reflect all publicly available information, and they react quickly and unbiasedly to new public announcements.

Here, the share price was fairly static before the profit warning, then fell 20% on the day of the announcement. That suggests:

The market did not know this bad news beforehand.

When the profit warning was announced (new public info), the price immediately adjusted.

That is classic semi-strong efficiency behaviour.

Weak form only says prices reflect past price data, not necessarily public news.

Strong form would imply even insider information is already reflected, so you might have seen movement before the announcement.

“Random walk” describes the pattern of price movements, not a level of efficiency in this context.

Earnings attributable to ordinary shareholders = profit after preference dividend = $500m.

Current number of shares = 1,250m.

Current EPS = 500 / 1,250 = $0.40 per share.

Share repurchase: 20% of 1,250m = 250m shares bought back and cancelled.

New number of shares = 1,250m − 250m = 1,000m shares.

Assuming profit is unchanged:

New EPS = 500 / 1,000 = $0.50 per share.

Increase in EPS = 0.50 − 0.40 = $0.10 → $0.100.

PPP fails in practice when prices of goods can’t equalise across countries because of frictions or structural differences:

B. Consumer tastes – different baskets of goods, so the “same” price index isn’t really comparable.

D. Import tariffs – artificial price wedges created by governments.

E. Transport costs – make it impossible to arbitrage price differences away fully.

Arbitrage (A) actually helps PPP hold, not prevents it, and differing tax regimes (C) are less central in standard PPP discussions than tariffs and transport.

✅ Answer Q122: B, D, E

Under typical takeover regulation and CIMA F3 principles, the following are legitimate post-offer defences:

A. Independent professional revaluation of assets

This is legitimate: providing better information to shareholders to show that the bid undervalues the company.

C. Make a counter-bid for Company A (a “Pac-Man defence”)

This is acceptable if it can be justified as enhancing shareholder wealth.

E. Refer the bid to competition authorities

It is a legitimate defence to challenge the bid on competition/antitrust grounds if it may reduce competition.

In contrast:

B (altering the articles to change acceptance thresholds mid-bid) is a classic frustrating action, usually not allowed without shareholder approval during an offer period.

D (publishing knowingly unrealistic optimistic forecasts) is misleading and not permitted under market and takeover rules.

C. True – If the new project has a positive NPV, the company’s total value increases, so the actual ex-rights price can be higher than the purely mechanical TERP, which ignores project NPV.

E. True – Under Modigliani & Miller with tax, the cost of equity increases with gearing (more debt → more financial risk). A rights issue used to finance a project reduces D/E, so the cost of equity will fall compared with a more highly geared structure.

The others are false:

A. No rule that the issue price must be 20% below the market price.

B. A deep discount encourages take-up but cannot guarantee it.

D. Low gearing would usually allow more debt, not force an equity issue.

A. Net book value (NBV) is based on historical cost and accounting conventions → it often doesn’t reflect current economic value. This is a disadvantage.

C. Many intangibles (brands, know-how, human capital, internally generated IP) are not recognised on the balance sheet, so a net asset valuation can seriously understate value → disadvantage.

D. Net realisable value (what assets could actually be sold for) is usually different from NBV, again showing NBV is a poor proxy for real value → disadvantage.

B. “Can be obtained from the financial statements” – that’s an advantage (it’s easy and cheap).

E. NBV of current assets is often reasonably close to realisable value (especially cash, receivables less bad debts, short-term inventory), so that’s not a disadvantage.

So the three disadvantages are A, C and D.

 A. The corporate tax rate in country P is 40%.

Tax in P (40%) is higher than in T (20%), so moving profits to P via a subsidiary gives a tax disadvantage, not an advantage.

 B. There are restrictions on companies wishing to remit profit from country P

That makes it harder to get cash out of P – this is a disadvantage of having a subsidiary there.

 C. Year 1 tax depreciation allowances of 100% are available in country P. ✅

This is very attractive for an investment in a manufacturing subsidiary. A 100% first-year allowance means the company can deduct the full cost of qualifying assets immediately, reducing taxable profit and tax in early years. That’s a clear advantage to setting up in P.

 D. There is a double tax treaty between country T and country P. ✅

A double tax treaty usually prevents the same profits being taxed twice and provides tax credits/relief for foreign taxes. This especially matters when you operate via a foreign subsidiary. So it’s an advantage to establishing a subsidiary in P.

 E. There are high customs duties payable on products entering country P. ✅

If the company exports directly from T, it pays high customs duties into P. If it manufactures inside P via a subsidiary, those import duties are avoided. So high customs duties on imports are an argument in favour of local production via a subsidiary – a clear advantage of establishing the subsidiary.

In CIMA F3, capital structure choice affects tax, risk and shareholder expectations. Debt interest is tax-deductible whereas dividends are not, so using more debt reduces taxable profit. Therefore statement A (“no impact on tax”) is false. Retained earnings are not “free”: shareholders could have taken that cash and invested elsewhere, so the cost of retained earnings equals the cost of equity – B is false.

As gearing rises, equity becomes riskier because fixed interest must be paid before any earnings go to shareholders. Under Modigliani–Miller with or without tax, this raises the cost of equity, so D is true. Replacing debt with equity reduces the probability of default and so reduces overall financial risk, making E true.

Issuing more equity increases the number of shares; investors will expect dividends on those shares in future, so total dividend outflows are likely to rise even if DPS stays the same. This added distribution pressure makes F true. C (“debt is always preferable”) is rejected in F3 because of higher financial risk and potential increase in WACC beyond an optimal gearing level.

MAN wants to expand internationally, especially into country P and to access a more global customer base.

Option B gives MAN:

A company physically located in country P, already operating in that market.

An established global customer base, which matches the strategic objective.

The question tells us that country P has:

The same language as M

Free movement of labour from M

No exchange controls or withholding tax

A favourable double tax treaty

→ So there are few barriers to owning and managing a business based in country P.

Options A and C are both based in country M, so they don’t give MAN a direct base in country P.

Option D is based in P but with a large proportion of customers in M, which doesn’t meet the aim of expanding into P and globally.

So, B best fits MAN’s strategic aim with manageable extra risk.