Free CIMA F3 Practice Exam with Questions & Answers | Set: 7

 A – Correct definition of natural capital under .

 C – States the primary purpose correctly: explaining value creation over time to providers of financial capital.

 D – Sustainability information is a key component of an integrated report.

We want methods that give the value of equity, not the value of the whole entity.

A. D₁ / (kₑ – g) → Gordon growth dividend model = value of equity (share value). ✅

B. Total earnings × P/E → market capitalisation = equity value. ✅

C. Free cash flows to all investors discounted at WACC → enterprise / firm value (equity + debt). ❌

D. Free cash flows to equity discounted at cost of equity → equity value. ✅

E. NCA + CA − CL → value of net assets before deducting long-term debt, i.e. value of the business to all capital providers, not just equity. ❌

So correct choices: A, B, D.

CIMA F3 covers takeover defences under Mergers and Acquisitions and Corporate Governance. A crucial distinction is made between legitimate post-offer defences, which are actions taken after a bid has been announced and are consistent with directors’ fiduciary duties, and illegitimate or unethical actions, which may mislead shareholders or breach takeover regulations.

Once a bid is hostile, the directors of the target company (Company B) are required under governance principles emphasised in F3 to act in the best interests of shareholders, not merely to preserve their own positions.

Option A is a legitimate defence.

Having the company’s assets independently and professionally revalued is acceptable and encouraged under CIMA F3. This provides shareholders with objective evidence that the bid undervalues the company and supports informed decision-making without misleading the market.

Option C is a legitimate defence.

Making a counter-bid (often called a “Pac-Man defence”) is permitted provided it can be justified as enhancing shareholder wealth. CIMA F3 stresses that directors may pursue alternative strategic actions if they genuinely believe these will create greater value for shareholders than accepting the hostile offer.

Option E is a legitimate defence.

Referring the bid to competition authorities is allowed where there are genuine competition concerns. CIMA F3 notes that regulatory intervention is an appropriate and lawful route if the acquisition may breach competition law or significantly reduce market competition.

The remaining options are not legitimate:

B is not allowed post-offer, as changing the articles to block a bid breaches takeover rules and shareholder rights.

D is unethical and unlawful, as knowingly publishing misleading forecasts violates disclosure requirements and directors’ duties.

✅ Final Answer: A, C and E

A: Net position is pay floating (fixed to bank, receive fixed in swap, pay floating) → True.

B: No principal is exchanged in an interest rate swap → False.

C: LIBOR, not LIBID, is normally the reference rate → False.

D: Interest cash flows are exchanged periodically (e.g. annually) → True.

E: Swaps are usually between a company and a bank → True.

Answer: A, D, E

B – The largest issuer of bonds is the government.

C – Issuing bonds in the capital markets allows entities to borrow large amounts.

E – Corporate bond issues are normally underwritten.

(Companies do not have to be listed to issue bonds, and public bond markets are regulated, not unregulated.)

Approach A

Issue 10-year bond at 6% → net interest cost = 6.0%

Approach B

Borrow from bank at Libor + 2.5%

Enter 10-year swap. Market quote 4.0–4.2% vs Libor.

For a borrower wanting to pay fixed, it will pay the higher fixed rate (4.2%) and receive Libor.

Net cost under B:

Pay bank: Libor + 2.5%

Pay swap fixed: 4.2%

Receive from swap: Libor

Overall:

(Libor+2.5%)+4.2%−Libor=6.7%(\text{Libor} + 2.5\%) + 4.2\% - \text{Libor} = 6.7\%(Libor+2.5%)+4.2%−Libor=6.7%

So B costs 6.7% p.a. vs A at 6.0% p.a.

Difference = 0.7% per year, with Approach A cheaper.

Answer: A – Approach A is 0.7% a year less expensive.

Correct answer: D. Companies A and B have the same business risk

Business risk is measured by asset beta.

A and B both have asset beta = 1.16, so same business risk.

C has higher asset beta (1.20), so highest business risk.