Free CIMA F3 Practice Exam with Questions & Answers | Set: 9

Applying an industry P/E ratio to DDD's forecast earnings.

This requirement is a standard interest rate parity (IRP) application from CIMA F3 foreign exchange management. Where the spot rate is quoted as foreign currency per unit of home currency (here, A$ per PS, since 1 PS = 5 A$), CIMA F3 applies the parity relationship to forecast the exchange rate over the period using relative money-market interest rates. The forward/forecast rate is derived as:

Given:

p.a. (home deposits)

p.a. (foreign deposits)

PPP will receive A$5,000,000 in 3 months; converting at the forecast rate:

Rounded to the nearest thousand PS:

Under typical takeover regulation and CIMA F3 principles, the following are legitimate post-offer defences:

A. Independent professional revaluation of assets

This is legitimate: providing better information to shareholders to show that the bid undervalues the company.

C. Make a counter-bid for Company A (a “Pac-Man defence”)

This is acceptable if it can be justified as enhancing shareholder wealth.

E. Refer the bid to competition authorities

It is a legitimate defence to challenge the bid on competition/antitrust grounds if it may reduce competition.

In contrast:

B (altering the articles to change acceptance thresholds mid-bid) is a classic frustrating action, usually not allowed without shareholder approval during an offer period.

D (publishing knowingly unrealistic optimistic forecasts) is misleading and not permitted under market and takeover rules.

The company’s gearing is below its optimal level, so it plans to increase debt by issuing long-term bonds and using the proceeds to repurchase shares. CIMA F3 teaches that altering capital structure affects risk, cost of capital, and shareholder metrics.

A. Weighted Average Cost of Capital – Decreases (✔)

Since the company is moving toward its optimal gearing level, replacing equity with cheaper debt finance initially reduces WACC due to the tax shield on interest. This is a core Modigliani–Miller (with tax) implication emphasised in F3.

B. Cost of equity – Increases (✘)

Higher gearing increases financial risk to equity holders, so the cost of equity rises, not falls.

C. Interest cover – Decreases (✔)

Interest expense rises due to the new bond issue while earnings remain unchanged. This reduces interest cover, a key credit-risk indicator in F3.

D. Dividend per share – Increases (✘)

The same total dividend is paid but fewer shares remain after the buy-back, so dividend per share increases.

E. Gearing (book value) – Decreases (✔)

This is a common exam trap. Equity is reduced sharply due to the buy-back, and debt rises. However, because equity is reduced faster than debt rises, the denominator (debt + equity) falls, reducing the ratio based on book values as defined in the question.

F. Number of shares – Decreases (✘)

Shares do fall, but the question asks which measures decrease most likely; F3 focuses on financial metrics rather than mechanical outcomes.

The project lasts four years and will be sold at the end; the firm wants to minimise annual cashflow payments on the debt.

Bank loans and finance leases usually require amortising payments (interest + principal) → higher annual cashflows.

Standard bonds pay full coupon at market rate → higher annual interest than bonds with attached warrants.

Bonds with warrants allow investors extra value via the warrant, so the coupon can be set lower, cutting annual interest payments; principal is typically repaid at maturity, matching the project sale.

Answer: A. Bonds with warrants

Equity: $30m

Debt: $35m at 5% interest, redeemable in 5 years

They require 30% p.a. compound on the equity and no dividends are paid.

Equity value required in 5 years

Future value=30×1.35=30×3.71293≈$111.39m\text{Future value} = 30 \times 1.3^5 = 30 \times 3.71293 \approx \$111.39\text{m}Future value=30×1.35=30×3.71293≈$111.39m

Debt cash flows

Annual interest: 35×5%=$1.75m35 \times 5\% = \$1.75\text{m}35×5%=$1.75m → over 5 years: 1.75×5=$8.75m1.75 \times 5 = \$8.75\text{m}1.75×5=$8.75m

Principal repaid in year 5: $35m

Total due to venture capitalists

111.39+8.75+35=$155.14m (approx)111.39 + 8.75 + 35 = \$155.14\text{m (approx)}111.39+8.75+35=$155.14m (approx)

Answer: A. $155.14 million

Forecast P&L (’000):

Operating profit = 1,300

Interest at 5% on $10m = 500

Profit before tax = 800

Tax (25%) = 200

Profit after tax = 600

Profit after tax ≈ free cash flow (FCF).

Planned uses of next year’s FCF at current rates:

Investment in non-current assets = 400

Dividend = 150

Total = 550, leaving 50 spare from FCF 600.

If interest rises to 6%:

New interest = 10m × 6% = 600

New PBT = 1,300 − 600 = 700

Tax = 25% of 700 = 175

New PAT (FCF) = 700 − 175 = 525

Available for investment after paying the same dividend 150:

525−150=375525 - 150 = 375525−150=375

Original planned investment = 400 → now only 375 possible.

Reduction in planned investment = 400 − 375 = 25.

Answer: A. $25,000

(Existing value 2m × 15 = 30m; add $12m cash + $6m NPV = 48m total.

Shares after issue = 3m ⇒ 48 / 3 = $16.)QUESTION NO: 199047

A listed company is planning a share repurchase. 

The following data applies:

   • There are 10 million shares in issue

   • The  share repurchase will involve buying back 20% of the shares at a price of $0.75

   • The company is holding $2 million cash

   • Earnings for the current year ended are $2 million

The Directors are concerned about the impact that this repurchase programme will have on the company's cash balance and current year earnings per share (EPS) ratio.

Advise the directors which of the following statements is correct?

A. The cash balance will decrease by 75% and EPS will decrease by 25%.

B. The cash balance will decrease by 75% and EPS will increase by 25%.

C. The cash balance will decrease by 20% and the EPS will decrease by 25%.

D. The cash balance will decrease by 20% and the EPS will increase by 25%.

Answer: B

(Cash used = 2m shares × $0.75 = $1.5m; from $2m ⇒ 75% fall.

EPS: before = 2m / 10m = $0.20; after = 2m / 8m = $0.25 ⇒ 25% increase.)

Current values (before project):

Equity = 1,100

Debt = 500

Firm value = 1,600

Project cost = 200; NPV = +10.

After the project:

Financed by rights issue (equity only)

Equity = 1,310 → increase of 210

But shareholders have to inject 200 cash themselves.

Net gain in shareholder wealth = 210 − 200 = 10

Financed by bond issue (all debt)

Equity = 1,150 → increase of 50

No new equity cash is put in by shareholders.

Net gain in shareholder wealth = 50

This equals: project NPV (10) + tax shield on extra debt (0.20 × 200 = 40).

Financed by mix of debt & equity at existing D/E

Equity = 1,260 → increase of 160

New equity raised ≈ 137 (since extra debt is 63, total 200).

Net gain = 160 − 137 = 23 (NPV 10 + extra tax shield ≈ 13).

The company’s objective is maximisation of shareholder wealth, so it should choose the financing that gives the highest net increase, which is the bond issue (all debt) with a gain of $50m to equity holders.

This is exactly what Modigliani & Miller with corporate tax predicts: increasing gearing creates value for shareholders via the interest tax shield.

Answer: B. $50 million if financed by debt