Pass the CIMA Strategic F3 Questions and answers with Dumpstech

Using PPP to forecast the Year-3 exchange rate:

S0=1.30 USD/GBP,iUK=2%, iUS=4%S_0 = 1.30\ \text{USD/GBP},\quad i_{UK}=2\%,\ i_{US}=4\%S0​=1.30 USD/GBP,iUK​=2%, iUS​=4%

Many exam questions use:

S3=S0(1+iUS1+iUK)3=1.30(1.041.02)3≈1.2257 USD/GBPS_3 = S_0 \left(\frac{1+i_{US}}{1+i_{UK}}\right)^3 = 1.30\left(\frac{1.04}{1.02}\right)^3 \approx 1.2257\ \text{USD/GBP}S3​=S0​(1+iUK​1+iUS​​)3=1.30(1.021.04​)3≈1.2257 USD/GBP

Year-3 GBP remittance:

GBP3=580,0001.2257≈472,916\text{GBP}_3 = \frac{580,000}{1.2257} \approx 472,916GBP3​=1.2257580,000​≈472,916

Answer: C – GBP472,916

G has effectively created an interest rate collar:

Buys a cap at 10% (protects against high rates).

Sells a floor at 8.5% (gives up benefit if rates fall too low, to reduce cost).

So:

A – True: G sacrifices gains from falling rates to help fund the cap.

B – True: the structure keeps G’s effective borrowing rate between 8.5% and 10%.

C – True: the main concern is rates rising above 10%, hence the cap.

D and E misinterpret the direction of the concern.

Shares repurchased = 20% × 10m = 2m

Cash used = 2m × $0.75 = $1.5m

Original cash = $2m → decrease = 1.5/2 = 75%

EPS:

Earnings = $2m

Shares before = 10m → EPS = 2/10 = $0.20

Shares after = 8m → EPS = 2/8 = $0.25

Increase in EPS = (0.25 − 0.20)/0.20 = 25%

Answer: B. The cash balance will decrease by 75% and EPS will increase by 25%.

A. Any opportunity to benefit from future exchange rate movements is lost.

True – a money market hedge locks in the effective exchange rate now, so you remove both downside risk and upside potential.

B. It can be tailored to match the size of the payment.

True – you can structure the borrowing/lending and FX transaction to exactly match the foreign currency amount due.

C. It manages transaction risk.

True – transaction risk (uncertainty in the home currency value of a known future foreign-currency cash flow) is what a money market hedge directly addresses.

D. It offers a significantly better outcome than a forward contract.

False – under interest rate parity, a money market hedge and a forward contract should give similar effective rates (ignoring spreads and costs).

E. It avoids the need to find immediate finance.

False – for a payable, you normally borrow or use cash now as part of the hedge, so it does not avoid immediate financing; it actually requires it.

✅ Answer to Q29: A, B, C

A. Private company buys back the equity shares – VC can sell its shares back to the company → full exit.

C. Company obtains a stock market listing – creates a market for the shares; VC can sell on IPO or in the market → exit.

E. Trade sale of shares to an external 3rd party – classic VC exit route.

A rights issue (B) or stock split (D) do not, by themselves, provide an exit – they just change capital structure or number of shares.

In CIMA F3, finance leases are analysed as a form of debt financing and are compared directly with bank loans when evaluating long-term funding options. The syllabus (under Financing Decisions and Leasing vs Buying) explains that a finance lease is economically similar to borrowing to purchase an asset, because the lessee assumes substantially all the risks and rewards of ownership.

Option B is correct because one key advantage of a finance lease over a bank loan is that the lessor retains legal ownership of the asset, which provides strong security for the lender. As a result, the lessor’s risk is lower than that of a bank providing an unsecured or partially secured loan. CIMA F3 study guidance highlights that this reduced risk can allow the lessor to offer more favourable interest rates or financing terms than a conventional bank loan.

The other options are incorrect under current accounting and financial strategy principles:

A is incorrect because finance leases are not off-balance sheet. Under IFRS 16 (examined in F3), finance leases must be recognised on the statement of financial position, increasing both assets and liabilities and therefore affecting gearing.

C is incorrect because tax depreciation (capital allowances) normally remain with the legal owner, the lessor. These benefits are not “passed on” directly, although they may be reflected indirectly in lease pricing.

D is incorrect because maintenance is a feature of operating leases, not finance leases. In a finance lease, the lessee is responsible for maintenance and insurance.

Price to buy each target (equity market value):

A = 25

B = 62

C = 67

D = 60 (all $m)

Combined equity value before deducting cash consideration:

Z + A = 620

Z + B = 655

Z + C = 666

Z + D = 652 (all $m)

After paying cash, equity value = “combined value” − “price paid”:

A: 620 − 25 = 595

B: 655 − 62 = 593

C: 666 − 67 = 599

D: 652 − 60 = 592

Best post-acquisition value is with C (599m).

Answer: C – Acquire Company C.

Comprehensive and Detailed Step by Step Explanation with all CIMA F3: Financial Strategy documents: =

When valuing a business by discounting free cash flows to the firm (FCFF), CIMA F3 explains that the correct discount rate is the weighted average cost of capital (WACC) of that specific business, not the parent’s WACC. FCFF are cash flows available to both debt and equity providers, so they must be discounted using a rate that blends the required returns of debt and equity in proportion to the company’s own capital structure.

The subsidiary operates in training, a different line of business from the publishing parent, so its business risk is better represented by the asset beta of a comparable listed training company. F3 teaches that you should use a sector asset beta to capture operating risk, then apply the gearing (debt-to-equity mix) of the business being valued to derive an appropriate WACC. Because the intention is to dispose of the subsidiary as a stand-alone entity, the relevant gearing is that of the subsidiary, not the publishing group.

Option C is therefore correct: it uses a WACC (appropriate for FCFF), based on the subsidiary’s capital structure (financial risk) and the training-sector asset beta (business risk). Options A and D wrongly use the parent’s gearing, and B uses only a cost of equity rather than WACC, so they are inconsistent with F3 valuation principles.

(Existing value 2m × 15 = 30m; add $12m cash + $6m NPV = 48m total.

Shares after issue = 3m ⇒ 48 / 3 = $16.)QUESTION NO: 199047

A listed company is planning a share repurchase. 

The following data applies:

   • There are 10 million shares in issue

   • The  share repurchase will involve buying back 20% of the shares at a price of $0.75

   • The company is holding $2 million cash

   • Earnings for the current year ended are $2 million

The Directors are concerned about the impact that this repurchase programme will have on the company's cash balance and current year earnings per share (EPS) ratio.

Advise the directors which of the following statements is correct?

A. The cash balance will decrease by 75% and EPS will decrease by 25%.

B. The cash balance will decrease by 75% and EPS will increase by 25%.

C. The cash balance will decrease by 20% and the EPS will decrease by 25%.

D. The cash balance will decrease by 20% and the EPS will increase by 25%.

Answer: B

(Cash used = 2m shares × $0.75 = $1.5m; from $2m ⇒ 75% fall.

EPS: before = 2m / 10m = $0.20; after = 2m / 8m = $0.25 ⇒ 25% increase.)