Pass the CIMA CIMA Strategic F3 Questions and answers with CertsForce

Current year:

Revenue = $50m

PBIT = $10m → margin = 10/50 = 20%

Tax = 20%

Earnings = 10 × (1 − 0.20) = $8m

Next year:

Revenue still $50m

40% of revenue = $20m → margin falls to 18%

PBIT on this part=20×18%=3.6\text{PBIT on this part} = 20 \times 18\% = 3.6PBIT on this part=20×18%=3.6

60% of revenue = $30m → margin stays 20%

PBIT on this part=30×20%=6.0\text{PBIT on this part} = 30 \times 20\% = 6.0PBIT on this part=30×20%=6.0

Total PBIT next year:

3.6+6.0=9.6 million3.6 + 6.0 = 9.6\ \text{million}3.6+6.0=9.6 million

Earnings after tax next year:

9.6×(1−0.20)=9.6×0.8=7.68 million9.6 \times (1 - 0.20) = 9.6 \times 0.8 = 7.68\ \text{million}9.6×(1−0.20)=9.6×0.8=7.68 million

Percentage reduction in earnings:

8.00−7.688.00=0.328=0.04=4%\frac{8.00 - 7.68}{8.00} = \frac{0.32}{8} = 0.04 = 4\%8.008.00−7.68​=80.32​=0.04=4%

Correct option:

C. Reduction of 4.0%\boxed{\text{C. Reduction of 4.0\%}}C. Reduction of 4.0%​

They need cash within 6 months and Divisions A and B are core. Options:

A. Sale of Division B – sells a core division; strategically undesirable.

B. Closure of a division – doesn’t raise cash, likely costs cash (redundancies, closure costs).

C. Management buy-out of Division C – disposes of a non-core asset, raises cash, and there is known management interest. ✅

D. Demerger of Division C – typically does not raise cash; it just separates ownership.

So the most suitable exit strategy is C.

Residual dividend policy → dividends are not a good reflection of underlying performance → rules out A.

Highly cyclical earnings and capital structure not matched by listed peers make simple P/E comparison (D) unreliable.

Net asset value (C) rarely captures earnings potential for a going concern.

A discounted cash flow approach using free cash flows and a cost of equity derived from a proxy company (adjusted for gearing) is most appropriate.

Answer: B: Discounted cash flow analysis at WACC based on free cash flow to equity.

(Conceptually: FCFE discounted at cost of equity.)

Company X is an established, unquoted, specialist IT advisory firm with steady results, predictable dividends and cashflows. Company P is only buying 30% (a minority stake).

B. Dividend based using DVM – Very suitable because dividends are predictable and regular. For a minority stake, dividends are often the main measurable return, so a dividend valuation model is appropriate.

C. Cash based using free cash flow before interest – A DCF valuation based on free cash flow to the firm is also appropriate for a profitable, growing, going concern. You can value the whole business using FCFF and then take 30% of the equity value.

Asset-based (A) is less relevant for a specialist service company with relatively few tangible assets. P/E-based methods (D and E) are less ideal given there are few direct competitors, making comparables unreliable.

Current debt interest:

Existing: 5m×8%=0.40m5\text{m} \times 8\% = 0.40\text{m}5m×8%=0.40m

New: 2m×10%=0.20m2\text{m} \times 10\% = 0.20\text{m}2m×10%=0.20m

Total interest = 0.60m

Let annual sales = SSS.

Operating profit margin = 20% → OP = 0.20 S.

Interest cover covenant:

0.20S0.60≥4⇒0.20S≥2.4⇒S≥2.40.20=12.0 million\frac{0.20 S}{0.60} \ge 4 \Rightarrow 0.20 S \ge 2.4 \Rightarrow S \ge \frac{2.4}{0.20} = 12.0\ \text{million}0.600.20S​≥4⇒0.20S≥2.4⇒S≥0.202.4​=12.0 million

Correct answer: A. $12.00 million

Negatives for the bank:

A. Advanced, custom-made tech equipment – poor resale value and high obsolescence risk, weak security.

C. Premises on a long-term lease and not fully fitted out – limited asset security; further capital outlay still needed.

E. Essential ongoing R&D – continuing cash demands and uncertainty of returns.

Positives, so not negatives:

B. Continuing profitability and net cash generation – good for servicing debt.

D. Founders’ personal investment – shows commitment and loss-sharing; strengthens equity base.

Strategic reasons for a horizontal acquisition (same industry/level of value chain):

A Reduction of risk by building a larger portfolio – broader product / customer base in the same industry can reduce business risk → strategic.

C To achieve economies of scale – classic horizontal motive (sharing overheads, volume discounts, etc.).

E Reduction of competition – by acquiring a rival, the combined firm increases market power.

B is a financial motive (undervalued target), and D is a vertical integration motive.

Answer: A, C, E

A. Equity instead of debt reduces financial risk → ✅ True

B. Equity will create pressure for higher future DPS → too strong / not necessarily always → ❌

C. Debt always increases EPS → only if returns > cost of debt → ❌

D. Retained earnings is the cheapest form of equity finance (no issue costs) → ✅ True

E. More debt → higher financial risk → higher cost of equity (MM with gearing) → ✅ True

F. Debt is always preferable → clearly ❌

Correct three:

A, D, E\boxed{A,\ D,\ E}A, D, E​

 B – Shareholders care about real income, so they want dividend growth at least in line with inflation.

 C – Retained earnings must earn a return above inflation to create real value.

 D – Inflation’s effect on future cash flows and required returns must be considered when setting dividend policy.