Pass the CIMA CIMA Strategic F3 Questions and answers with CertsForce

CIMA F3 discusses exit strategies for owner-managed businesses under Business Valuation, Mergers and Acquisitions, and Private Equity. A key principle is that an appropriate exit route must align with the owners’ objectives, particularly the time horizon, desire for full value realisation, and the size and structure of the business.

In this scenario, Company AB is a medium-sized, owner-managed private company, with two founders who each control divisions and wish to realise the full value of their investment within 12 months. This tight timeframe significantly narrows the range of feasible exit strategies.

Option B – Management Buyout (MBO) is likely to be acceptable. CIMA F3 highlights that MBOs are common exit routes for founder-owned businesses where management has strong operational knowledge and where continuity of the business is important. Given that some employees are highly paid and critical to profitability, an MBO can help retain key staff while allowing the founders to exit fully, usually with private equity support. This route is realistic within a 12-month timeframe.

Option C – Sale to a larger competitor is also highly appropriate. F3 guidance explains that strategic buyers often pay a control premium because they can extract synergies such as economies of scale, elimination of duplicate functions, and enhanced market power. A trade sale is one of the fastest ways to realise full value and is commonly recommended where owners want a complete exit in a short period.

The other options are less suitable:

A (IPO) is unlikely due to high cost, regulatory burden, and long preparation time, making it unrealistic within 12 months.

D (Private equity earn-out) delays full value realisation and conflicts with the owners’ desire for a clean exit.

E (Spin-off/demerger) does not provide liquidity or an exit for the owners.

The items that most clearly enhance shareholder wealth are those that increase future cash flows or create valuable strategic assets:

D. Exploiting production synergies – cost savings / higher margins.

E. Elimination of existing competition – greater pricing power and market share.

F. Acquiring intellectual property assets – unique products, barriers to entry, licensing income.

Verified Answer: = B

CIMA F3 compares different forms of long-term finance, including preference shares and bonds/Eurobonds, focusing on control, tax treatment, gearing impact, and flexibility.

Statement B captures a key advantage of preference shares from the company’s perspective: if profits are poor, preference dividends can be omitted or deferred, especially when they are cumulative. Although unpaid dividends accumulate, non-payment does not normally constitute default in the same way as missing an interest payment on a bond. For a Eurobond, failure to pay interest when due would place the company in default, triggering legal and reputational consequences. This extra flexibility is exactly why preference shares might be favoured over bonds.

Statement A is misleading: Eurobonds are often unsecured, and security (or lack of it) is not a defining difference versus preference shares.

Statement C is incorrect in this context: redeemable cumulative preference shares are typically treated as a financial liability under IFRS (like debt), so they would generally increase gearing, not reduce it.

Statement D is clearly wrong as dividends are not tax-deductible, whereas bond interest normally is. Therefore, the best justification for issuing preference shares rather than a Eurobond is B.

Disadvantages of accepting cash for ZYY’s shareholders:

A. Low interest rates – cash reinvested in deposits earns little.

B. Capital gains tax is crystallised on disposal.

E. No chance to share in YZZ’s future growth once they’ve taken cash.

C and D are not disadvantages of cash (D is actually an advantage: certainty).

Company issues new shares and uses proceeds to repay high-interest debt.

Effects:

Cost of equity (A): financial risk falls as gearing falls → cost of equity is more likely to decrease, not increase.

Number of shares (B): new share issue → increases.

Corporate tax payment (C): interest expense falls, taxable profit rises → tax paid increases.

Gearing (D): debt falls and equity rises → gearing decreases, not increases.

Interest cover (E): operating profit unchanged, interest lower → interest cover increases.

Answer: B, C and E

For a company valued using the free cash flow to equity with constant growth, the standard Gordon growth formula is:

Value of equity=FCF1ke−g\text{Value of equity} = \frac{\text{FCF}_1}{k_e - g}Value of equity=ke​−gFCF1​​

Where:

FCF₁ = free cash flow in one year’s time

kek_eke​ = cost of equity

ggg = constant growth rate

Here:

FCF₁ = $100,000

ke=10%=0.10k_e = 10\% = 0.10ke​=10%=0.10

g=5%=0.05g = 5\% = 0.05g=5%=0.05

Correct valuation:

Value=100,0000.10−0.05=100,0000.05=$2,000,000\text{Value} = \frac{100{,}000}{0.10 - 0.05} = \frac{100{,}000}{0.05} = \$2{,}000{,}000Value=0.10−0.05100,000​=0.05100,000​=$2,000,000

The analyst instead did:

100,000×(1+0.05)/0.10=105,000/0.10=$1,050,000100{,}000 \times (1 + 0.05) / 0.10 = 105{,}000 / 0.10 = \$1{,}050{,}000100,000×(1+0.05)/0.10=105,000/0.10=$1,050,000

So the true value is $2,000,000 and the analyst’s value is $1,050,000.

Undervaluation=2,000,000−1,050,000=$950,000\text{Undervaluation} = 2{,}000{,}000 - 1{,}050{,}000 = \$950{,}000Undervaluation=2,000,000−1,050,000=$950,000

So the company has been undervalued by $950,000 → Option A.

Reasoning:

After an all-cash acquisition which the market views positively, shareholders in Company Z will mainly focus on value delivery from the deal:

A. Realisation of anticipated synergies – core reason for doing the deal.

C. Integration and retention of key employees – critical in an advertising business where human capital and client relationships are key.

E. Retention of key customers of the acquired company – losing major clients would quickly destroy acquisition value.

B is not a priority: target company shareholders have already been paid out in cash.

D is irrelevant now: the acquisition has already been completed, so regulatory approval is in the past.

Target earnings after tax for 20X2:

8.0m×1.05=8.4m8.0 \text{m} \times 1.05 = 8.4 \text{m}8.0m×1.05=8.4m

Interest on the new bond:

1.0m×4%=0.04m1.0 \text{m} \times 4\% = 0.04 \text{m}1.0m×4%=0.04m

Let required operating profit (PBIT) = XXX.

Profit before tax = X−0.04X - 0.04X−0.04.

Tax at 20% → profit after tax:

Earnings=(X−0.04)×0.8\text{Earnings} = (X - 0.04)\times 0.8Earnings=(X−0.04)×0.8

Set equal to the target 8.4m:

(X−0.04)×0.8=8.4⇒X−0.04=8.40.8=10.5⇒X=10.5+0.04=10.54m(X - 0.04)\times 0.8 = 8.4 \Rightarrow X - 0.04 = \frac{8.4}{0.8} = 10.5 \Rightarrow X = 10.5 + 0.04 = 10.54 \text{m}(X−0.04)×0.8=8.4⇒X−0.04=0.88.4​=10.5⇒X=10.5+0.04=10.54m

So minimum operating profit = $10.54 million.

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.