Free CIMA F3 Practice Exam with Questions & Answers

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.

Answer: D. Discounted cash flow analysis based on forecast future free cash flows.

Because the company is unlisted, growing faster than the industry, and pays only a fixed dividend (not linked to performance), dividend or simple P/E methods won’t capture its value properly. A DCF based on future free cash flows is most suitable.

Company pays 3.5% fixed on its borrowing and enters a swap at 3.4–3.5% vs 12-month USD risk-free rate.

To move from fixed to floating, it will receive fixed 3.4% and pay floating (risk-free):

Net interest:

3.5%−3.4%+rf=rf+0.1%3.5\% - 3.4\% + \text{rf} = \text{rf} + 0.1\%3.5%−3.4%+rf=rf+0.1%

Answer to Q102: C – 12-month USD risk-free rate plus 0.1%

Last year’s profit before interest and tax (PBIT) = $4.0m

Objective: PBIT to increase by 10% →

PBITthis year=4.0×1.10=4.4m\text{PBIT}_{\text{this year}} = 4.0 \times 1.10 = 4.4\text{m}PBITthis year​=4.0×1.10=4.4m

New long-term debt = $2m at 5% interest →

Interest = 2.0×0.05=0.1m2.0 \times 0.05 = 0.1\text{m}2.0×0.05=0.1m

Profit before tax (PBT):

4.4−0.1=4.3m4.4 - 0.1 = 4.3\text{m}4.4−0.1=4.3m

Tax at 20%:

Tax=4.3×0.20=0.86m\text{Tax} = 4.3 \times 0.20 = 0.86\text{m}Tax=4.3×0.20=0.86m

Earnings after tax:

Earnings=4.3−0.86=3.44m\text{Earnings} = 4.3 - 0.86 = 3.44\text{m}Earnings=4.3−0.86=3.44m

Dividend payout ratio = 40% of earnings:

Total dividends=3.44×0.40=1.376m\text{Total dividends} = 3.44 \times 0.40 = 1.376\text{m}Total dividends=3.44×0.40=1.376m

Shares in issue = 2m → Dividend per share:

DPS=1.3762=0.688≈$0.69\text{DPS} = \frac{1.376}{2} = 0.688 \approx \$0.69DPS=21.376​=0.688≈$0.69

So, correct DPS by calculation is about $0.69 per share. Since none of the given options (A–D) equals this, there is likely a typo or omission in the provided options, but the financially correct figure is $0.69.

Delta: 12% fixed or rf + 3% floating

Kappa: 15% fixed or rf + 4% floating

Delta’s advantage:

Fixed: 3% better (15 − 12)

Floating: 1% better (rf+4 − (rf+3))

Comparative advantage is in fixed; total potential gain from a swap = 3% − 1% = 2%, shared equally → 1% saving each.

So:

Delta (wants floating): (rf + 3%) − 1% = rf + 2%

Kappa (wants fixed): 15% − 1% = 14%

So D: Delta pays rf + 2%, Kappa pays 14%.

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.