Pass the CIMA CIMA Strategic F3 Questions and answers with CertsForce

Post-acquisition, Company X’s annual post-tax cash flow = 8m in perpetuity.

Cost of equity = 10%.

Combined value after acquisition:

Vcombined=80.10=80 millionV_{\text{combined}} = \frac{8}{0.10} = 80\ \text{million}Vcombined​=0.108​=80 million

Pre-acquisition total value:

VX+VY=50+20=70 millionV_X + V_Y = 50 + 20 = 70\ \text{million}VX​+VY​=50+20=70 million

Synergy value:

Synergy=80−70=10 million\text{Synergy} = 80 - 70 = 10\ \text{million}Synergy=80−70=10 million

✅ Answer: A. $10 million

The seller will mainly care about:

Protecting the rest of the group – whether the sale would damage the remaining divisions.

Receiving an acceptable price – whether the MBO team can actually finance the deal.

Evaluate each option:

A: Confidential information about other divisions – If the team leaves and runs an independent business, they could use that confidential information against the remaining divisions. This clearly influences the parent’s decision. ✅

B: Skills/experience important to other divisions – If these managers are key to the success of other divisions, the parent may not want to lose them. This also directly affects the decision. ✅

C: Ability to raise finance at a reasonable price – If the team cannot raise sufficient funds, or can only do so on terms that depress the price, the parent might not proceed. This is crucial to whether the sale can happen. ✅

D: Ability to manage the divested division successfully – this matters more to the venture capitalist than to the selling company once the division is sold.

E: Conditions imposed by the venture capitalist – primarily a concern for the management team and VC, unless they somehow affect the sale price or parent’s risk, which is not indicated here.

Correct answer: A, B and C.

Pre-acquisition standalone values:

ABB = $55m

BBA = $25m

Total pre-deal value = $80m.

After the acquisition, ABB (the combined business) is expected to generate post-tax cash flows of $10m per year in perpetuity. Cost of equity = 10%, and the firm is all-equity financed, so:

Post-acquisition value=100.10=$100m\text{Post-acquisition value} = \frac{10}{0.10} = \$100\text{m}Post-acquisition value=0.1010​=$100m

Synergy value = value of combined firm − sum of standalone values:

Synergy=100−80=$20m\text{Synergy} = 100 - 80 = \$20\text{m}Synergy=100−80=$20m

So the best estimate of the synergy from the acquisition is $20 million.

 A listing usually improves access to finance; it doesn’t make it harder to borrow.

 A stock exchange listing can enhance reputation, transparency and access to capital, which can improve the company’s credit rating, lowering the perceived risk to suppliers and lenders → B is correct.

 C may sometimes happen but isn’t a standard, expected consequence in the way B is.

 D is wrong – owners do not have to sell a majority or leave the board when listing.

We’re comparing valuation using forecast cash flows to equity (DCF / FCFE) vs P/E multiple:

A. Using cash is theoretically superior to using profits – True. Valuation theory (and CIMA F3) say value is based on cash flows, not accounting profits. Cash flow–based valuation is more theoretically robust than P/E-based (profit-based) methods.

B. It gives an estimate of the likely shareholder value that will be created – True. Discounting forecast cash flows to equity gives a direct estimate of the present value of future benefits to shareholders, i.e. shareholder value. A P/E multiple is more of a relative/comparative shortcut.

D. It incorporates the time value of money – True. DCF explicitly discounts future cash flows back to present value at the cost of equity. A simple P/E multiple does not explicitly model timing.

Not correct:

C – DCF is more complex, not simpler.

E – You still need long-term growth assumptions (terminal value), so it does not avoid growth forecasting problems.

From the projections, the company’s interest cover remains above the required 3 times, so that covenant is satisfied. However, after paying the increased dividend (10% rise in DPS), the retained earnings for the year fall below the required $3.5 million, so the company would breach only the retained earnings covenant.

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.

Quick check of each offer (per Company Z share):

Current price of Z: $5

Required 15% premium:

5×1.15=5.755 \times 1.15 = 5.755×1.15=5.75

Cash offer = $5.50

Premium = (5.50 − 5) / 5 = 10% → below 15%

Share-for-share: 3 A shares for every 2 Z shares

For 1 Z share → 1.5 A shares

A’s price = $4 → value = 1.5 × 4 = $6.00

Premium = (6 − 5) / 5 = 20% → above 15%

Bond offer: 1 bond for every 20 Z shares

Coupon = 10.5% of 100 = 10.5

Required yield = 10% → bond value ≈ 10.5 / 0.10 = $105

Value per Z share = 105 / 20 = $5.25

Premium = (5.25 − 5) / 5 = 5% → below 15%

So only the share exchange meets her required premium → C is correct.

The division is loss-making, with poor management and obsolete assets. It needs a $20m investment, but PV of future cash flows is only $15m → negative NPV of –$5m if retained.

The company wants to raise cash, so methods that don’t raise cash (de-merger, spin-off) are inappropriate.

Trade sale (C): sell the division to another company that may be better able to invest/manage it – brings in cash.

Liquidation (D): close the division and sell the assets – also raises cash and avoids further losses.

MBO (A) is unlikely, since current management is identified as part of the problem.

Answer: C and D