Free CIMA F3 Practice Exam with Questions & Answers | Set: 6

Economy = obtaining quality inputs at minimum cost → D

Efficiency = obtaining maximum output from minimum inputs → C ✅

Effectiveness = spending funds so as to achieve the objectives → A

So efficiency is correctly defined by C.

IFRS 7 requires detailed disclosures of financial instrument risks, specifically:

Credit risk – exposure to counterparties failing to meet obligations.

Market risk – currency, interest rate, and other price risks.

Liquidity risk – ability to meet obligations as they fall due.

Business risk and enterprise risk are broader strategic concepts, not the focus of IFRS 7.

✅ Answer: A, C, and E

 Covenants are mainly there to protect the lender (B),

 to impose financial discipline on the borrower (C), and

 if breached, they usually give the lender rights to call in the loan or renegotiate (D).

They are not designed simply to penalise the company (A) or eliminate tax (E).

Discursive_F0

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

Consider each statement:

A. Foreign tax rate 40% – higher than home 20% → disadvantage.

B. Double tax treaty – avoids double taxation on profits remitted → advantage.

C. 100% Year-1 tax depreciation in foreign country – big early tax shield → advantage.

D. High customs duties on imports into foreign country – makes exporting costly; local production via subsidiary avoids duties → advantage.

E. Restrictions on remitting profits – makes getting cash out difficult → disadvantage.

Answer: B, C, and D

 Interest cover = PBIT / Interest = 20 / 5 = 4 times ≥ 3 ⇒ covenant met.

 Next year dividend per share = 0.04 × 1.10 = 0.044.

Total dividend = 0.044 × 200m = 8.8m.

Retained earnings = Earnings – Dividends = 12 – 8.8 = 3.2m < 3.5m ⇒ retained-earnings covenant breached only.

1. Sell from domestic market

Revenue = A$100,000

Costs (given) = A$45,000

Import duty = 10% of 100,000 = A$10,000 (tax-deductible)

Profit before tax = 100,000 − 45,000 − 10,000 = A$45,000

Tax at 25% = 0.25 × 45,000 = A$11,250

Profit after tax = 45,000 − 11,250 = A$33,750

2. Sell via foreign subsidiary

Revenue = B$104,500

Costs = B$49,500

Profit before tax = 104,500 − 49,500 = B$55,000

Tax at 30% = 0.30 × 55,000 = B$16,500

Profit after tax = 55,000 − 16,500 = B$38,500

Convert to A$ at A$1 = B$1.10:

A$ profit = 38,500 / 1.10 = A$35,000

Foreign subsidiary gives the higher after-tax profit.

Answer: C. Foreign subsidiary: A$35,000

Venture capitalists typically exit by:

Flotation/IPO (B)

Trade sale to another company (C)

Sale back to the original owners/management (D)

Liquidation (A) is a failure scenario, not a planned exit, and raising long-term debt (E) is not an exit at all.

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.

VC wants to exit in 5 years at a significant profit.

A: Buyback at original cost → no profit → not preferred.

B: IPO within 5 years → creates market to sell at premium → preferred.

C: Put option to sell back to company at twice cost → guarantees profit → preferred.

D: Right to sell to any third party if no listing → provides liquidity / exit route → preferred.

E: Management can buy at nominal value → would likely be a loss → not preferred.

Answer: B, C, D