Pass the CIMA Strategic F3 Questions and answers with Dumpstech

In CIMA F3’s coverage of short-term financing, commercial paper (CP) is identified as a very cost-effective funding source for large, high-credit-quality companies. CP is an unsecured, short-term promissory note, typically issued for periods up to 270 days, making it ideal for a 6-month funding need. Because it is issued directly into the money markets by strong credits, the interest cost is usually lower than overdrafts or short-term bank loans, which include a bank’s margin.

The scenario states that the company is large, listed, has an “excellent credit rating”, minimal default risk and already has a commercial paper programme. This matches the textbook profile of a company for which CP is the cheapest source of short-term borrowing.

Treasury bills (C) are issued by governments, not companies, so they are an investment vehicle, not a borrowing method here. Bank overdrafts (A) are flexible but generally expensive and better for fluctuating day-to-day needs. A 6-month term loan (B) tends to involve higher arrangement fees and interest margins than CP. Therefore, option D is the most cost-effective choice.

IFRS 7 requires sensitivity analysis for market risks: currency risk, interest rate risk and other price risk (which includes commodities), not credit or liquidity.

Answer: A, C, D

The question asks for advantages to the acquiring company (ADC/ABC) of using shares rather than cash to pay for DEF.

C. It incentivises DEF to continue creating value for the combined group

If DEF’s shareholders (and possibly managers) receive shares in ADC, they now own part of the combined business. That aligns their interests with ADC’s existing shareholders and encourages them to help grow the value of the group.

E. The risk of poor future performance of the acquisition is shared with the DEF company shareholder.

If ADC pays with shares, DEF’s shareholders share in both the upside and downside. If the acquisition underperforms, the fall in value is shared instead of all the risk resting on ADC’s original shareholders. That’s an advantage for ADC.

F. It preserves liquidity

Paying with shares means ADC does not need to use up cash or raise new debt. This preserves cash balances and borrowing capacity, which is a clear advantage.

Why not the others?

A (sharing benefits of future growth with DEF shareholders) is actually a cost from ADC’s existing shareholders’ viewpoint – they give away more of the upside.

B dilution of ownership is also a disadvantage, not an advantage.

D a tax saving for ABC – the tax impact is usually more relevant for sellers or when using debt, not typically a direct advantage of share consideration to the acquirer.

Economy = obtaining quality inputs at minimum cost → D

Efficiency = obtaining maximum output from minimum inputs → C ✅

Effectiveness = spending funds so as to achieve the objectives → A

So efficiency is correctly defined by C.

Effective borrowing costs:

No hedge (D): pay floating = 2%, 3%, 4%

Average = (2 + 3 + 4) / 3 = 3.0%

Swap at 3.1% (A): fixed 3.1% every year

Average = 3.1%

Cap at 3% with premium 0.533% (B):

Year 1: 2% + 0.533 = 2.533%

Year 2: 3% + 0.533 = 3.533%

Year 3: min(4%,3%) + 0.533 = 3.533%

Average ≈ 3.20%

Zero-cost collar 2.9–4% (C):

Year 1: floored at 2.9%

Year 2: 3%

Year 3: 4% (at cap)

Average = (2.9 + 3 + 4) / 3 ≈ 3.30%

Lowest cost is no hedge.

Answer Q74: D

The IIRC’s Integrated Reporting Framework is about showing how an organisation creates value over short, medium and long term, not just financial but using all capitals.

Step 1 – Work out current gearing

Current values:

Equity = $80m

Debt = $20m

Total value VVV = 80 + 20 = $100m

So:

DE=2080=0.25\frac{D}{E} = \frac{20}{80} = 0.25ED​=8020​=0.25

Tax rate T=20%T = 20\%T=20% → after-tax cost of debt:

Kd(1−T)=6%(1−0.2)=4.8%K_d(1-T) = 6\%(1-0.2) = 4.8\%Kd​(1−T)=6%(1−0.2)=4.8%

Given cost of equity Ke=14%K_e = 14\%Ke​=14%.

Step 2 – Find the ungeared (asset) cost of capital KuK_uKu​

Use Modigliani–Miller with tax for equity:

Ke=Ku+(Ku−Kd)(1−T)DEK_e = K_u + (K_u - K_d)(1-T)\frac{D}{E}Ke​=Ku​+(Ku​−Kd​)(1−T)ED​

Substitute:

14=Ku+(Ku−6)×0.8×0.2514 = K_u + (K_u - 6)\times 0.8 \times 0.2514=Ku​+(Ku​−6)×0.8×0.25 14=Ku+0.2(Ku−6)14 = K_u + 0.2(K_u - 6)14=Ku​+0.2(Ku​−6) 14=1.2Ku−1.214 = 1.2K_u - 1.214=1.2Ku​−1.2 1.2Ku=15.2⇒Ku≈12.67%1.2K_u = 15.2 \Rightarrow K_u \approx 12.67\%1.2Ku​=15.2⇒Ku​≈12.67%

Step 3 – Re-gear the cost of equity for the new structure

New target mix: Debt : Equity = 40 : 60 ⇒

DE=4060=0.6667\frac{D}{E} = \frac{40}{60} = 0.6667ED​=6040​=0.6667

Reapply MM with tax:

Ke′=Ku+(Ku−Kd)(1−T)DEK_e' = K_u + (K_u - K_d)(1-T)\frac{D}{E}Ke′​=Ku​+(Ku​−Kd​)(1−T)ED​ Ke′=12.67+(12.67−6)×0.8×0.6667K_e' = 12.67 + (12.67 - 6)\times 0.8 \times 0.6667Ke′​=12.67+(12.67−6)×0.8×0.6667 Ke′≈12.67+3.56=16.23%K_e' \approx 12.67 + 3.56 = 16.23\%Ke′​≈12.67+3.56=16.23%

Step 4 – Calculate new WACC

New proportions:

E/V=60100=0.6,D/V=40100=0.4E/V = \frac{60}{100} = 0.6,\quad D/V = \frac{40}{100} = 0.4E/V=10060​=0.6,D/V=10040​=0.4 WACC′=0.6×16.23%+0.4×4.8%\text{WACC}' = 0.6 \times 16.23\% + 0.4 \times 4.8\%WACC′=0.6×16.23%+0.4×4.8% WACC′≈9.74%+1.92%=11.66%\text{WACC}' \approx 9.74\% + 1.92\% = 11.66\%WACC′≈9.74%+1.92%=11.66%