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CIMA F3 (Financial Strategy) Exam is an important part of the CIMA qualification, which is recognized globally as a leading professional qualification for management accountants. The F3 Exam is designed to test the candidate's ability to apply financial strategy concepts and techniques to real-life business situations. CIMAPRA19-F03-1 exam is divided into two sections: Section A and Section B. Section A consists of 35 objective test questions, while Section B is a case study that comprises of a set of questions related to the case study.
CIMA CIMAPRA19-F03-1 (F3 Financial Strategy) Certification Exam is an essential requirement for individuals who want to become certified members of the Chartered Institute of Management Accountants (CIMA). CIMAPRA19-F03-1 exam covers a wide range of topics related to financial strategy development and implementation, including financial risk management. CIMAPRA19-F03-1 exam is a computer-based test that consists of objective-type questions and is divided into two sections. CIMAPRA19-F03-1 exam is designed to assess the candidate's knowledge and understanding of financial strategy development and implementation.
Preparing for the CIMA F3 exam requires candidates to have a solid understanding of financial management principles and practices. Candidates should be familiar with financial statements, budgeting and forecasting, risk management, and financial analysis. They should also have a good understanding of how to use financial information to make informed business decisions. CIMA provides a range of study materials and resources to help candidates prepare for the exam.
NEW QUESTION # 261
ART manufactures traditional scooters. It has an equity beta of 1.4 and is financed entirely by equity. It plans to continue to be all-equity financed in future.
It is considering producing a range of electric scooters
GGG is a comparable quoted electric scooter manufacturer GGG has an equity beta of 2 4 reflecting its high level of gearing (the ratio of debt to equity is VI using market values).
The risk-free rate is 5%, and the market premium is 6%.
The rate of corporation tax is 20%
What is the recommended discount rate that ART should use to assess the project to manufacture electric scooters?
Answer:
Explanation:
13%
1. De-gear GGG's equity beta to get its asset betaGGG's data:Equity beta #e=2.4\beta_e = 2.4#e=
2. 4Gearing D/E=1D/E = 1D/E=1 (market values)Tax rate T=20%T = 20\%T=20%Formula:#a=#e1+(1#T) DE\beta_a = \frac{\beta_e}{1 + (1-T)\frac{D}{E}}#a=1+(1#T)ED#e #a=2.41+0.8×1=2.41.8=43#1.33\beta_a
= \frac{2.4}{1 + 0.8 \times 1} = \frac{2.4}{1.8} = \frac{4}{3} \approx 1.33#a=1+0.8×12.4=1.82.4=34#1.33 This asset beta represents the business risk of electric scooters.2. Re-gear for ART's capital structureART is and will remain all-equity financed, so for the project:#project=#a#1.33\beta_{\text{project}} = \beta_a
\approx 1.33#project=#a#1.33 3. Use CAPM to get the discount rateGiven:Risk-free rate Rf=5%R_f = 5\% Rf=5%Market risk premium (Rm#Rf)=6%(R_m - R_f) = 6\%(Rm#Rf)=6%Required return=Rf+#project (Rm#Rf)=5%+1.33×6%=5%+8%=13%\text{Required return} = R_f + \beta_{\text{project}}(R_m - R_f) =
5\% + 1.33 \times 6\% = 5\% + 8\% = 13\%Required return=Rf+#project(Rm#Rf)=5%+1.33×6%=5%+8%
=13% Recommended discount rate (nearest whole %): 13%
NEW QUESTION # 262
A consultancy company is dependent for profits and growth on the high value individuals it employs.
The company has relatively few tangible assets.
Select the most appropriate reason for the net asset valuation method being considered unsuitable for such a company.
- A. It does not account for the intangible assets.
- B. It accounts for the intangible assets at historical value.
- C. It accounts for intangible assets at net realisable value.
- D. It does not account for tangible assets.
Answer: A
NEW QUESTION # 263
A company has a loss-making division that it has decided to divest in order to raise cash for other parts of the business.
The losses stem from a combination of a lack of capital investment and poor divisional management.
The loss-making division would require new capital investment of at least $20 million in order to replace worn out and obsolete assets.
If this investment was carried out, the present value of the future cashflows, excluding the investment expenditure, is expected to be $15 million.
Which TWO of the following divestment methods are most likely to be suitable for the company?
- A. Liquidation
- B. Trade sale
- C. De-merger
- D. Spin-off
- E. Management buy-out
Answer: A,B
NEW QUESTION # 264
Company A plans to acquire Company B, an unlisted company which has been in business for 3 years.
It has incurred losses in its first 3 years but is expected to become highly profitable in the near future.
No listed companies in the country operate the same business field as Company B, a unique new high-risk business process.
The future success of the process and hence the future growth rate in earnings and dividends is difficult to determine.
Company A is assessing the validity of using the dividend growth method to value Company B.
Which THREE of the following are weaknesses of using the dividend growth model to value an unlisted company such as Company HHG?
- A. The cost of capital will be difficult to estimate.
- B. The future projected dividend stream is used as the basis for the valuation.
- C. The dividend growth model does not take the time value of money into consideration.
- D. The company has been unprofitable to date and hence, there is no established dividend payment pattern.
- E. The future growth rate in earnings and dividends will be difficult to accurately determine.
Answer: A,D,E
Explanation:
CIMA F3 explains that the Dividend Growth Model (DGM) is only suitable where dividends are stable, predictable, and capable of being forecast with reasonable confidence. It is therefore weak when applied to young, unlisted, high-risk companies, especially those with uncertain future cash flows.
A). No established dividend payment pattern - # Correct
Company B has made losses in its first three years and has not paid dividends. CIMA F3 explicitly states that the dividend growth model is unsuitable where there is no dividend history, because the model relies on extrapolating future dividends from past patterns.
B). Uses future projected dividends - # Incorrect
This is not a weakness, but a fundamental feature of the dividend growth model. All valuation models are forward-looking, and CIMA F3 does not consider this a limitation.
C). Growth rate difficult to determine - # Correct
The business operates in a unique, high-risk sector, and future earnings and dividends are highly uncertain.
CIMA F3 highlights that the DGM is extremely sensitive to the assumed growth rate, making it unreliable when growth cannot be estimated with confidence.
D). Time value of money ignored - # Incorrect
The dividend growth model explicitly discounts future dividends, meaning it fully incorporates the time value of money, a core principle taught in F3.
E). Cost of capital difficult to estimate - # Correct
As an unlisted company, Company B has no observable beta or market data. CIMA F3 stresses that estimating the cost of equity for private, high-risk businesses is problematic, reducing the reliability of DGM outputs.
NEW QUESTION # 265
A company is undertaking a lease-or-buy evaluation, using the post-tax cost of bank borrowing as the discount rate.
Details of the two alternatives are as follows:
Buy option:
* To be financed by a bank loan
* Tax depreciation allowances are available on a reducing-balance basis
* Assets depreciated on a straight-line basis
Lease option:
* Finance lease
* Maintenance to be paid by the lessee
* Tax relief available on interest payments and book depreciation
Which THREE of the following are relevant cashflows in the lease-or-buy appraisal?
- A. Tax relief on tax depreciation allowances
- B. Tax relief on the book depreciation
- C. Lease payments
- D. Maintenance payments
- E. Bank loan payments
Answer: A,B,C
Explanation:
Relevant cash flows for a lease-or-buy decision (discounting at post-tax cost of borrowing) are:
A). Tax relief on tax depreciation allowances - relevant for the buy option.
B). Bank loan payments - not relevant; financing flows are excluded when using the borrowing rate as discount rate.
C). Maintenance payments - here, maintenance is paid by the lessee under the lease, and would also be paid if the asset is bought; since it is the same under both options, it is not a differential cash flow.
D). Lease payments - relevant cash outflows under the lease option.
E). Tax relief on the book depreciation - relevant where tax relief is given on book depreciation (here, under the finance lease).
Therefore, the three relevant cash flows from the list are:
Answer (200259):
A, D, E\boxed{A,\ D,\ E}A, D, E
NEW QUESTION # 266
Which THREE of the following statements are disadvantages of the net asset basis of valuation?
- A. The net book value of assets can be obtained from the financial statements
- B. Intangible assets are often not shown in the company's financial statements.
- C. The net book value of assets is merely a record of past transactions which complies with accounting conventions
- D. The net book value of current assets is normally a reliable indicator of their realisable value
- E. The net realisable value is usually different from the net book value shown in the financial statements
Answer: B,C,E
NEW QUESTION # 267
Providers of debt finance often insist on covenants being entered into when providing debt finance for companies.
Agreement and adherence to the specific covenants is often a condition of the loan provided by the lender.
Which THREE of the following statements are true in respect of covenants?
- A. Covenants enable the lender to demand immediate repayment or to renegotiate terms if it is breached.
- B. Covenants are entered into to impose financial discipline on the company.
- C. Covenants are entered into to give the lender added protection on the loan extended to the company.
- D. Covenants are entered into to penalise the company.
- E. Covenants are entered into to eliminate the tax liability of the company.
Answer: A,B,C
Explanation:
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
NEW QUESTION # 268
NNN is a company financed by both equity and debt. The directors of NNN wish to calculate a valuation of the company's equity and at a recent board meeting discussed various methods of business valuation.
Which THREE of the following are appropriate methods for the directors of NNN to use in this instance?
- A. Total earnings multiplied by a suitable price-earnings ratio.
- B. Cash flow to all investors discounted at WACC.
- C. Cash flow to equity discounted at the cost of equity.
- D. Cash flow to all investors discounted at WACC less the value of debt.
- E. Cash flow to equity discounted at the cost of equity less the value of debt.
Answer: A,C,D
Explanation:
NNN is financed by both equity and debt, and the directors specifically want the value of the equity. Valid approaches are:
A). Total earnings × P/E ratio - Correct
Using a suitable sector or market price-earnings multiple and multiplying by NNN's earnings gives an estimate of the equity value directly.
B). Cash flow to all investors discounted at WACC less the value of debt - Correct Discounting free cash flow to the firm (to all investors) at the WACC gives the enterprise value (debt + equity). Subtracting the market value of debt then leaves an estimate of the equity value.
C). Cash flow to all investors discounted at WACC - Not sufficient
This gives the total firm value, not just the equity. On its own, it doesn't answer the question.
D). Cash flow to equity discounted at the cost of equity less the value of debt - Incorrect Discounting cash flow to equity at the cost of equity already produces equity value. Subtracting debt again would be conceptually wrong (double counting).
E). Cash flow to equity discounted at the cost of equity - Correct
This is the standard free cash flow to equity (FCFE) valuation method and directly yields the value of equity.
So the appropriate methods here are A, B and E.
NEW QUESTION # 269
A listed company has recently announced a profit warning.
The company's share price fell 20% on the day of the announcement but had been fairly static in the weeks leading up to the announcement.
Which form of efficient market is most likely to be indicated by this share price movement?
- A. Random walk
- B. Weak form
- C. Semi-strong form
- D. Strong form
Answer: C
NEW QUESTION # 270
Company A is a listed company that produces pottery goods which it sells throughout Europe. The pottery is then delivered to a network of self employed artists who are contracted to paint the pottery in their own homes.
Finished goods are distributed by network of sales agents.The directors of Company A are now considering acquiring one or more smaller companies by means of vertical integration to improve profit margins.
Advise the Board of Company A which of the following acquisitions is most likely to achieve the stated aim of vertical integration?
- A. A pottery factory in the Middle East.
- B. A company that produces accessories.
- C. A company in a similar market to Company A.
- D. A listed international logistics firm.
Answer: D
NEW QUESTION # 271
A company is reporting under IFRS 7 Financial Instruments: Disclosures for the first time and the directors are concerned about whether this will lead to the disclosure of information that could affect the company's share price.
The company is based in a country that uses the A$ but 40% of revenue relates to export sales to the USA and priced in US$.
When the company reports under IFRS 7 for the first time, the share price is most likely to:
- A. Stay the same since US$ risk can already be quantified from segmental analysis disclosures included elsewhere in the annual report.
- B. Either increase or decrease depending on market reaction to new information on how financial risk is managed.
- C. Decrease since investors place a lower value on higher risk businesses.
- D. Increase due to greater clarity of information available on the extent of US$ risks and how they are managed.
Answer: B
Explanation:
IFRS 7 requires detailed disclosures about financial instruments and risk management, including currency risk, sensitivity analysis, and how those risks are managed. When these are published for the first time, investors may learn new information about:
The extent of US$ exposure (40% export sales), and
The quality of risk management (hedging, matching, etc.).
Efficient market theory (covered in F3) says prices adjust to new, relevant information. That new information could make investors more confident (if risks are well managed) or more concerned (if risks are high and poorly managed). So the share price could either increase or decrease, depending on the market's reaction.
That matches option D.
Options A and C assume a one-way direction (always up or always down), which is unrealistic. B is wrong because segmental analysis does not normally give the same detailed, risk-focused disclosure as IFRS 7.
NEW QUESTION # 272
Company M's current profit before interest and taxation is $5.0 million.
It has a long-term 10% corporate bond in issue with a nominal value of $10 million.
The rate of corporate tax is 25%.
It plans to continue to pay out 50% of its earnings in dividends and earnings are expected to grow by 3% each year in perpetuity.
Its cost of equity is 10%.
Using the dividend growth model, advise the Board of Directors of Company M which of the following provide a reasonable valuation of Company M's equity?
- A. $50.1 million
- B. $73.6 million
- C. $44.1 million
- D. $22.1 million
Answer: D
NEW QUESTION # 273
Which THREE of the following statements are correct in respect of the issuance of debt securities.
- A. The redemption yield on a corporate bond can be determined by calculating the internal rate of return based on the cash flows arising during the duration of the bond.
- B. Governments are the most frequent issuers of bonds and the proceeds are used to fund government expenditure or service the national debt.
- C. Investors in traded bonds have an ownership (or equity stake) in the company which issued the bonds.
- D. A corporate entity coming to the bond market for the first time will find it easier to issue corporate bonds than to arrange a conventional term loan.
- E. A bond issuer must appoint at least one market-maker to ensure that there is a liquid market in its traded bonds.
Answer: B,C,D
NEW QUESTION # 274
A company wishes to raise additional debt finance and is assessing the impact this will have on key ratios.
The following data currently applies:
* Profit before interest and tax for the current year is $500,000
* Long term debt of $300,000 at a fixed interest rate of 5%
* 250,000 shares in issue with a share price of $8
The company plans to borrow an additional $200,000 on the first day of the year to invest in new project which will improve annual profit before interest and tax by $24,000.
The additional debt would carry an interest rate of 3%.
Assume the number of shares in issue remain constant but the share price will increase to $8.50 after the investment.
The rate of corporate income tax is 30%.
After the investment, which of the following statements is correct?
- A. Interest cover will rise; P/E ratio will fall.
- B. Interest cover will fall; P/E ratio will fall.
- C. Interest cover will fall; P/E ratio will rise.
- D. Interest cover will rise; P/E ratio will rise.
Answer: C
NEW QUESTION # 275
A company currently has a 6.25% fixed rate loan but it wishes to change the interest style of the loan to variable by using an interest rate swap directly with the bank.
The bank has quoted the following swap rate:
* 5.50% - 5.55% in exchange for LIBOR
LIBOR is currently 5%.
If the company enters into the swap and LIBOR remains at 5%, what will the company's interest cost be?
- A. 5.75%
- B. 5.00%
- C. 6.25%
- D. 5.70%
Answer: A
Explanation:
Swap quote: 5.50%-5.55% vs LIBOR.
To turn its 6.25% fixed loan into variable, the company must receive fixed and pay LIBOR, so it deals at the bank's bid rate of 5.50%.
Net cost = pay 6.25% (loan) # receive 5.50% (swap) + pay LIBOR
= 0.75% + LIBOR = 0.75% + 5.00% = 5.75%
NEW QUESTION # 276
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