Pass the CIMA CIMA Strategic F3 Questions and answers with CertsForce

Current KKA share price = $5.00

Cash offer: $5.75 per share

Premium = (5.75 − 5.00) / 5.00 = 0.75 / 5 = 15%

Bond offer: market value $90 bond for 15 KKA shares

Value per KKA share = 90 / 15 = $6.00

Premium = (6.00 − 5.00) / 5.00 = 1 / 5 = 20%

The highest premium is therefore 20% on the bond offer, i.e. option B.

The primary purpose of the IIRC’s Integrated Reporting Framework is to help organisations explain how they create value in the short, medium and long term. That wording is taken directly from how integrated reporting is framed conceptually. So B is correct.

Most suitable valuation method for an unlisted company that has only recently made a (small) loss and has very irregular dividends is an earnings-based multiple using comparables, not a dividend model or pure asset valuation.

Answer: D – The P/E method, adjusting the P/E of a listed company downwards to reflect R’s unlisted status.

A company introduces debt; under Modigliani & Miller without tax the overall WACC is unchanged, so as gearing (D/E) rises the cost of equity must increase to compensate shareholders for higher financial risk.

Answer: C. increase.

A. An IPO is normally underwritten – Correct. For a fixed-price IPO, underwriters usually guarantee that the issue will be taken up, giving certainty of proceeds.

B. The government will receive significant financial resources from the sale – Correct. In a privatisation, the government is selling its ownership stake; the cash from selling these shares flows to the government.

C. The national airline employees will no longer be public sector employees – Correct. Once privatised, the airline becomes a private-sector company; its staff cease to be public-sector employees.

D is incorrect: a fixed-price offer does not guarantee maximum proceeds – the shares are often deliberately underpriced to ensure the issue is fully subscribed.

E is incorrect: in this scenario the proceeds go to the government as seller of existing shares, not directly to the airline itself.

B. Diversification into another product market will lower business risk

Diversifying into a different sector can reduce unsystematic (business-specific) risk, as cash flows from different industries may be less correlated.

C. Greater protection from transaction risk

Company A already has B$ exposures (manufacturing and a B$ loan). Acquiring Company B, which operates and earns in B$, can provide B$ inflows that help naturally hedge B$ outflows, reducing transaction risk.

D. Greater protection from translation risk

The acquisition adds net assets in B$, which can act as a balance sheet hedge against existing B$ liabilities (such as the B$ loan). On consolidation, this can reduce the volatility of reported equity due to exchange rate movements, i.e. translation risk.

Option A is weak: political risk in Country B is not reduced by owning more assets there. E is doubtful because Company B is in a different industrial sector, so classic production scale economies are unlikely to be a primary justification.

 A – Founders’ pension/income adequacy is important in a closely held, owner-managed firm.

 C – Their future cash needs are central to dividend decisions.

 E – Personal tax position of the (few) shareholders is very relevant.

A company with no projects for 2 years and a WACC of 10% should not lock surplus cash into investments earning less than 10%, as that destroys shareholder value. The best way to maximise shareholder wealth is to return the surplus so shareholders can invest at their own required return.

✅ Answer: D. Paying the surplus cash as a dividend at the earliest opportunity.

Director A – You can issue bonds without having listed equity, but a “public issue” of bonds still involves heavy regulation and doesn’t remove the need for disclosure. This is not what the question is really getting at → treat as not correct.

Director B – AIM still has regulatory requirements; they are lighter, not non-existent → incorrect.

Director C – Rights issues are for existing shareholders of (normally) listed companies; an unlisted company cannot raise unlimited equity this way → incorrect.

Director D – Listing improves marketability and visibility and generally increases the ability to raise both equity and debt → correct.

Director E – Listed status makes shares more easily tradable and the company more visible, so it becomes a more likely takeover target → correct.

Answer: D and E.

CIMA F3 links the cost of debt to the tax shield created by the tax deductibility of interest. The effective cost of servicing debt to a company is therefore the post-tax cost of debt, commonly expressed as kd(1−T)k_d(1-T)kd​(1−T). This makes statement C correct: when evaluating financing decisions and WACC, the company benefits from interest tax relief, so the relevant servicing cost is after tax. Statement A is also treated as correct in the standard F3 exam context: zero-coupon debt pays no periodic coupon interest, so there are no regular interest payments generating the conventional annual tax-deductible interest expense and therefore the familiar tax-shield effect on “interest payments” is not obtained in the same way (i.e., the typical coupon-based shield is eliminated). Statement B is incorrect because the size of the tax shield depends on the tax rate; if corporation tax changes, the value of the tax relief changes. Statement D is incorrect because if corporation tax rates rise, the tax shield from deductible interest would increase, not reduce (a higher tax rate increases the tax saving per dollar of interest). Hence the two correct statements are A and C.