Free CIMA F3 Practice Exam with Questions & Answers | Set: 3

In a semi-strong efficient market, today’s share price already reflects all publicly available information, including the news about the successful new phone and revised growth forecasts. So the best estimate of equity value today is simply:

Market cap=Current share price×number of shares\text{Market cap} = \text{Current share price} \times \text{number of shares}Market cap=Current share price×number of shares

No adjustment for retained earnings, and no need to redo valuation models if the market is semi-strong efficient.

Answer: B: Today’s share price × number of shares in issue.

Dividend Growth Model (DGM):

P0=D1ke−gP_0 = \frac{D_1}{k_e - g}P0​=ke​−gD1​​

Dividend just paid: D0=0.08D_0 = 0.08D0​=0.08

Dividend growth: g=2%=0.02g = 2\% = 0.02g=2%=0.02

Cost of equity: ke=15%=0.15k_e = 15\% = 0.15ke​=15%=0.15

Future dividend:

D1=D0(1+g)=0.08×1.02=0.0816D_1 = D_0 (1+g) = 0.08 \times 1.02 = 0.0816D1​=D0​(1+g)=0.08×1.02=0.0816

Theoretical price:

P0=0.08160.15−0.02=0.08160.13≈0.63P_0 = \frac{0.0816}{0.15 - 0.02} = \frac{0.0816}{0.13} \approx 0.63P0​=0.15−0.020.0816​=0.130.0816​≈0.63

Current market price = 0.60

Expected change: 0.63−0.60=0.030.63 - 0.60 = 0.030.63−0.60=0.03 increase → Option A.

A net asset valuation is based mainly on the book value of tangible and recognised intangible assets in the statement of financial position. In a consultancy company, most of the value lies in human capital, know-how, reputation, client relationships, etc. These are usually not recognised as assets under accounting rules (they’re internally generated intangibles).

So a net asset basis would seriously understate the true value of the company because it effectively ignores the main value driver. That’s why:

A is correct – it does not account for the intangible assets (like human capital).

B and C are wrong – most of these intangibles aren’t even on the balance sheet, so they aren’t valued at historical or NRV.

D is wrong – tangible assets are included; the problem is that they are relatively unimportant here.

CIMA F3 emphasises that shareholders expect directors to focus on value creation after an acquisition, particularly in the areas that protect and enhance the cash flows and synergies that justified the deal. Following an all-cash acquisition, the target’s former shareholders have exited, so the acquirer’s shareholders will not prioritise tailoring dividends to meet the target shareholders’ preferences (B is not relevant). Also, the question states the acquisition has just been completed, so regulatory approval needed to complete the acquisition (C) is no longer a priority stage item. What matters immediately is executing post-deal integration to secure the expected benefits. First, directors must ensure integration and retention of key employees from the acquired firm (A), especially in service/knowledge businesses where people drive client relationships and operational capability. Second, they must protect revenues by retaining the acquired firm’s key customers (D); losing customers can destroy acquisition value quickly. Third, they must deliver the deal logic by realising anticipated post-acquisition synergies (E), such as cost savings, higher capacity utilisation, cross-selling, and process improvements. These priorities align with F3’s post-merger integration focus: preserve the earnings base, then convert strategic fit into measurable synergy cash flows.

F Co is private, owned 60% by founder, 20% each by two children.

Needs a large amount of long-term finance within 3 months.

IPO rejected because it would take up to 12 months.

Venture Capitalist (VC) offers finance (debt + equity) but wants:

60% of equity

25% annual return

A board seat

Veto over all expenditure over a certain level.

Question: From the family’s perspective, which are advantages of using the VC?

Option-by-option

A. The cost of the finance – DISADVANTAGE

A required return of 25% and taking 60% of the equity is expensive; the family is giving up control and paying a high expected return. That’s not an advantage.

B. Changes in shareholding – DISADVANTAGE

Post-investment, the VC would own 60%, the family only 40% collectively. They lose control. That’s clearly a downside for them.

C. Veto on expenditure – DISADVANTAGE (for the family)

A VC veto on capital and revenue spend restricts management/family autonomy. While it may improve governance, it’s not an “advantage from the family’s perspective”.

D. Speed with which finance can be obtained – ADVANTAGE ✅

VC money can typically be arranged much faster than an IPO, which is crucial because the company needs funds within 3 months. This is explicitly given as a reason IPO is not suitable.

E. Experience of the Venture Capitalist with growing businesses – ADVANTAGE ✅

VCs often bring expertise, contacts, and strategic guidance in scaling businesses. From the family’s point of view, this support can increase the chances of successful expansion.

So the genuine advantages to the family are:

D (speed) and

E (experience).

 A. The shareholder can choose whether to take the cash or not.

With a repurchase, shareholders can decide to sell (take cash) or keep their shares. A one-off dividend forces all shareholders to receive cash.

 C. It means that the company will be able to pay lower total dividends in the future.

After a buyback there are fewer shares in issue. If the company keeps the same dividend per share, the total dividend outlay falls – good for future cash flow and flexibility.

 E. It will not create an expectation for future increased dividends.

A large one-off dividend may be interpreted as a permanent increase, creating pressure to maintain higher payouts. A buyback is seen as a more one-off, discretionary event, so it avoids that expectation.

 B is wrong: a repurchase reduces, not increases, shares in issue.

 D is not an advantage relative to a dividend – both methods return cash that shareholders can spend as they wish.

A. Any opportunity to benefit from future exchange rate movements is lost.

True – a money market hedge locks in the effective exchange rate now, so you remove both downside risk and upside potential.

B. It can be tailored to match the size of the payment.

True – you can structure the borrowing/lending and FX transaction to exactly match the foreign currency amount due.

C. It manages transaction risk.

True – transaction risk (uncertainty in the home currency value of a known future foreign-currency cash flow) is what a money market hedge directly addresses.

D. It offers a significantly better outcome than a forward contract.

False – under interest rate parity, a money market hedge and a forward contract should give similar effective rates (ignoring spreads and costs).

E. It avoids the need to find immediate finance.

False – for a payable, you normally borrow or use cash now as part of the hedge, so it does not avoid immediate financing; it actually requires it.

✅ Answer to Q29: A, B, C

In an MBO structure, senior bank debt has first claim on cash flows. Failure to pay interest on this debt can trigger default, covenants being breached, and potentially insolvency or loss of control.

Director bonuses (B) and dividends to the VC (C) are discretionary and can usually be postponed.

Inability to invest in new projects (D) is harmful for growth but less immediately threatening than defaulting on senior debt.

So the most critical cash use that must be covered is interest on bank debt.

In semi-strong form market efficiency, share prices reflect all publicly available information, and they react quickly and unbiasedly to new public announcements.

Here, the share price was fairly static before the profit warning, then fell 20% on the day of the announcement. That suggests:

The market did not know this bad news beforehand.

When the profit warning was announced (new public info), the price immediately adjusted.

That is classic semi-strong efficiency behaviour.

Weak form only says prices reflect past price data, not necessarily public news.

Strong form would imply even insider information is already reflected, so you might have seen movement before the announcement.

“Random walk” describes the pattern of price movements, not a level of efficiency in this context.

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