Pass the CIMA Strategic F3 Questions and answers with Dumpstech

A company has a 5.25% fixed-rate loan and wants to swap it to variable using a swap quoted:

4.50% – 4.55% in exchange for Libor

(Libor currently 4%)

To turn its fixed loan into a synthetic floating-rate loan, the company needs to:

Receive fixed (to offset part of the 5.25% it pays on the loan), and

Pay Libor (to end up with variable cost).

From the swap quote, if the company wants to receive fixed, it gets the lower rate: 4.50% (the bank’s bid rate).

Cash flows:

Pay 5.25% fixed on the loan

Receive 4.50% fixed on the swap

Pay Libor (4.00%) on the swap

Net cost:

5.25%−4.50%+4.00%=0.75%+4.00%=4.75%5.25\% - 4.50\% + 4.00\% = 0.75\% + 4.00\% = 4.75\%5.25%−4.50%+4.00%=0.75%+4.00%=4.75%

✅ Answer to Q28: B. 4.75%

The parent wants to sell a loss-making subsidiary, with two options:

Trade sale to an external buyer

Management Buyout (MBO) – where the subsidiary’s existing management team buys it.

Both offer the same price, so we compare non-price factors.

With an MBO:

The existing management are the buyers. So instead of fearing job losses or big changes, they benefit directly.

That makes them supportive, not hostile.

Therefore, the parent company is more likely to avoid a hostile reaction from key management – this is a clear advantage of choosing an MBO over a trade sale.

Why not the others?

A. Raise the cash more quickly – MBOs often need complex financing (private equity, bank debt), which can actually slow things down versus a straightforward trade sale.

C. Focus on core competencies – that’s a benefit of divesting in general, not specific to MBO vs trade sale.

D. Retain the knowledge of key management – in an MBO, management usually leave with the business, so the parent loses their knowledge, not retains it.

Workings:

Z$ profit after tax = 10m

Tax rate in Z = 20%

Pre-tax profit in Z:

101−0.20=100.8=12.5m\frac{10}{1 - 0.20} = \frac{10}{0.8} = 12.5\text{m}1−0.2010​=0.810​=12.5m

Home country Y taxes at 50%, with full double tax relief → overall tax rate becomes 50% on pre-tax profits:

Net profit after all tax in Z$:

12.5×(1−0.50)=6.25m12.5 \times (1 - 0.50) = 6.25\text{m}12.5×(1−0.50)=6.25m

Exchange rate: Y$1 = Z$5 → convert:

6.255=1.25m\frac{6.25}{5} = 1.25\text{m}56.25​=1.25m

So expected profit in Y$ = 1.25m → A.

Likely outcomes after two listed companies in the same industry merge:

A. Increase in customer base – yes, customers of both firms now belong to the combined entity.

B. Competition authorities step in to stop… – that usually happens before or to prevent the merger, not “after it has happened”, so not chosen.

C. Decrease in employee motivation due to internal changes – very common effect of mergers (uncertainty, restructuring).

D. Changes to supplier relationships owing to internal changes – the merged firm will have different bargaining power and processes; very likely.

E. Cost savings from synergistic benefits and economies of scale – one of the main motives for merger.

Answer: A, C, D, E

 Covenants are mainly there to protect the lender (B),

 to impose financial discipline on the borrower (C), and

 if breached, they usually give the lender rights to call in the loan or renegotiate (D).

They are not designed simply to penalise the company (A) or eliminate tax (E).

Discursive_F0

 A – True: a scrip dividend converts distributable reserves into share capital (non-distributable).

 C – True: more shares in issue increases future dividend expectations.

 D – True: it creates extra admin/secretarial work versus simply paying no dividend.

CIMA F3 emphasises that shareholders expect directors to focus on value creation after an acquisition, particularly in the areas that protect and enhance the cash flows and synergies that justified the deal. Following an all-cash acquisition, the target’s former shareholders have exited, so the acquirer’s shareholders will not prioritise tailoring dividends to meet the target shareholders’ preferences (B is not relevant). Also, the question states the acquisition has just been completed, so regulatory approval needed to complete the acquisition (C) is no longer a priority stage item. What matters immediately is executing post-deal integration to secure the expected benefits. First, directors must ensure integration and retention of key employees from the acquired firm (A), especially in service/knowledge businesses where people drive client relationships and operational capability. Second, they must protect revenues by retaining the acquired firm’s key customers (D); losing customers can destroy acquisition value quickly. Third, they must deliver the deal logic by realising anticipated post-acquisition synergies (E), such as cost savings, higher capacity utilisation, cross-selling, and process improvements. These priorities align with F3’s post-merger integration focus: preserve the earnings base, then convert strategic fit into measurable synergy cash flows.

Two percentage adjustments are to be made to the proxy P/E ratio:

20% reduction because Company K is unlisted (unlisted companies usually trade at a discount).

15% increase because Company K has better growth prospects than the proxy (higher growth → higher P/E).

In exam-style CIMA F3 questions, unless stated otherwise, these adjustments are usually treated additively:

Net adjustment = +15% − 20% = −5%, i.e. a 5% decrease in the proxy P/E ratio.

So the total adjustment is a 5% decrease.

PBIT = $1.1m

Debt = $2m at 5% → interest = $0.1m

Profit before tax = 1.1 – 0.1 = $1.0m

Tax at 20% = 0.2m → Earnings after tax = $0.8m

Earnings yield = Earnings ÷ Market value of equity = 10%:

0.8=0.10×MV⇒MV=0.80.10=$8m0.8 = 0.10 \times \text{MV} \Rightarrow \text{MV} = \frac{0.8}{0.10} = \$8\text{m}0.8=0.10×MV⇒MV=0.100.8​=$8m

Shares in issue = 4m → share price:

Price=84=$2.00\text{Price} = \frac{8}{4} = \$2.00Price=48​=$2.00

Answer: C: $2.00