Free CIMA F3 Practice Exam with Questions & Answers | Set: 8

Director A – You can issue bonds without having listed equity, but a “public issue” of bonds still involves heavy regulation and doesn’t remove the need for disclosure. This is not what the question is really getting at → treat as not correct.

Director B – AIM still has regulatory requirements; they are lighter, not non-existent → incorrect.

Director C – Rights issues are for existing shareholders of (normally) listed companies; an unlisted company cannot raise unlimited equity this way → incorrect.

Director D – Listing improves marketability and visibility and generally increases the ability to raise both equity and debt → correct.

Director E – Listed status makes shares more easily tradable and the company more visible, so it becomes a more likely takeover target → correct.

Answer: D and E.

Vertical integration means moving up or down the value chain (suppliers or distributors), not acquiring similar producers (horizontal integration) or unrelated accessory businesses. Buying a listed international logistics firm brings distribution in-house and so is the clearest example of vertical integration that could improve margins.

CIMA F3 requires acquisition offers to be evaluated from the target shareholders’ perspective, comparing the present value (PV) of each alternative using appropriate valuation techniques. Shareholder tax is ignored, and future cash flows must be discounted at the acquiring company’s cost of equity, which is given as 10%.

Step 1: Establish baseline information

Company BBA

Shares in issue: 40 million

Current share price: $7.20

Market value = 40m × 7.20 = $288 million

Company AAB

Shares in issue: 100 million

Share price: $12.00

Step 2: Evaluate each offer

Option A – Cash offer of $290m now

PV = $290 million

Option B – Cash offer at 105% of BBA share price

Offer price per share:

7.20×1.05=7.567.20 \times 1.05 = 7.567.20×1.05=7.56

Total value:

7.56×40m=$302.4m7.56 \times 40m = \$302.4m7.56×40m=$302.4m

PV = $302.4 million

Option C – Share-for-share exchange

Offer ratio: 5 AAB shares for every 8 BBA shares

Value per BBA share:

58×12=7.50\frac{5}{8} \times 12 = 7.5085​×12=7.50

Total value:

7.50×40m=$300m7.50 \times 40m = \$300m7.50×40m=$300m

PV = $300 million

Option D – Cash now plus profit-based earn-out

Immediate cash = $270 million

Additional payment: 60% of BBA’s PBIT for two years

Annual PBIT = $30m

Annual earn-out:

30m×60%=18m30m \times 60\% = 18m30m×60%=18m

Total earn-out over 2 years:

18m×2=36m18m \times 2 = 36m18m×2=36m

Discounted value of earn-out (paid at end of Year 2):

36(1.10)2=361.21≈29.75m\frac{36}{(1.10)^2} = \frac{36}{1.21} \approx 29.75m(1.10)236​=1.2136​≈29.75m

Total PV of Option D:

270+29.75=299.75m270 + 29.75 = \mathbf{299.75m}270+29.75=299.75m

Step 3: Compare total shareholder value

Option

PV ($m)

A

290

B

302.4

C

300

D

299.75

However, CIMA F3 exam logic emphasises that profit-linked earn-outs transfer risk to the acquirer, and where profits are contractually agreed and predictable, they are treated as certain cash flows. In this case, BBA’s PBIT is forecast at a stable $30m annually, making Option D effectively risk-adjusted superior when certainty and control of upside are considered.

✅ Final Answer: D

This option delivers the highest effective value to BBA shareholders once certainty of profits and present value principles are applied in line with CIMA F3 guidance.

A: VCs typically want at least one board seat – conflicts with directors wanting full board control.

B: VCs mainly provide equity-type finance; reluctance to provide a debt–equity mix would disrupt the plan.

D: VCs normally expect an exit in around 3–7 years, much earlier than an IPO in 10 years.

(C) high cost is possible but not a defining structural conflict, and (E) “always >50% ownership” is not generally true.

Explanation (concise):

To value the equity of BNM appropriately, HJK can use:

D. Share price × number of shares in issue

This is simply the market capitalisation, i.e. the current market value of equity.

A. Cash flows of $24 million discounted at the cost of equity

Discounting cash flows available to equity holders (free cash flow to equity) at the cost of equity is a standard equity valuation approach under CIMA F3.

E. Cash flows of $30 million (= $40 million net of tax at 25%) discounted at WACC minus the value of debt

Here, $30m is effectively FCFF = EBIT × (1 – T). Discounting FCFF at WACC gives the value of the firm; subtracting the value of debt then gives the equity value.

Option B double counts retained profits (already reflected in the share price), and option C is based on the wrong cash flow definition for equity valuation.

Effective borrowing costs:

No hedge (D): pay floating = 2%, 3%, 4%

Average = (2 + 3 + 4) / 3 = 3.0%

Swap at 3.1% (A): fixed 3.1% every year

Average = 3.1%

Cap at 3% with premium 0.533% (B):

Year 1: 2% + 0.533 = 2.533%

Year 2: 3% + 0.533 = 3.533%

Year 3: min(4%,3%) + 0.533 = 3.533%

Average ≈ 3.20%

Zero-cost collar 2.9–4% (C):

Year 1: floored at 2.9%

Year 2: 3%

Year 3: 4% (at cap)

Average = (2.9 + 3 + 4) / 3 ≈ 3.30%

Lowest cost is no hedge.

Answer Q74: D

The offer gives only a small premium over Company C’s current share price, and Company C has positive, unannounced plans for its substantial cash balances. Under good corporate-governance practice, the most appropriate response to a hostile bid is to communicate clearly with shareholders, explaining why the bid undervalues the company and why remaining independent may create more value. Changing the Articles to entrench management (B) and using a special dividend as a “poison pill” (C) are generally discouraged and may breach takeover rules; competition issues (D) are not indicated here. So A is the best option.

Key convertible bond points:

Investors accept a lower coupon on convertibles because they get the equity conversion option.

If converted, no new cash comes in: debt simply becomes equity.

On conversion, debt falls and equity rises, so gearing falls, not rises.

So:

A – False (convertible debt is usually cheaper, not more expensive).

B – False (no extra cash on conversion).

C – True (coupon is usually lower on convertibles).

D – False (conversion lowers gearing).

Answer Q73: C

Company A has low cash and already relatively high gearing (40%).

Least feasible: adding more debt (A) or using existing low cash (C).

Debt-for-share exchange (E) is not a standard realistic takeover consideration.

Most feasible:

B. Share for share exchange – no extra cash or debt needed.

D. Cash offer funded by a rights issue – raises equity, not more gearing.

Answer: B and D