F3 Exam Dumps - CIMA Strategic Questions and Answers

B. Diversification into another product market will lower business risk

Diversifying into a different sector can reduce unsystematic (business-specific) risk, as cash flows from different industries may be less correlated.

C. Greater protection from transaction risk

Company A already has B$ exposures (manufacturing and a B$ loan). Acquiring Company B, which operates and earns in B$, can provide B$ inflows that help naturally hedge B$ outflows, reducing transaction risk.

D. Greater protection from translation risk

The acquisition adds net assets in B$, which can act as a balance sheet hedge against existing B$ liabilities (such as the B$ loan). On consolidation, this can reduce the volatility of reported equity due to exchange rate movements, i.e. translation risk.

Option A is weak: political risk in Country B is not reduced by owning more assets there. E is doubtful because Company B is in a different industrial sector, so classic production scale economies are unlikely to be a primary justification.

In CIMA F3, finance leases are analysed as a form of debt financing and are compared directly with bank loans when evaluating long-term funding options. The syllabus (under Financing Decisions and Leasing vs Buying) explains that a finance lease is economically similar to borrowing to purchase an asset, because the lessee assumes substantially all the risks and rewards of ownership.

Option B is correct because one key advantage of a finance lease over a bank loan is that the lessor retains legal ownership of the asset, which provides strong security for the lender. As a result, the lessor’s risk is lower than that of a bank providing an unsecured or partially secured loan. CIMA F3 study guidance highlights that this reduced risk can allow the lessor to offer more favourable interest rates or financing terms than a conventional bank loan.

The other options are incorrect under current accounting and financial strategy principles:

A is incorrect because finance leases are not off-balance sheet. Under IFRS 16 (examined in F3), finance leases must be recognised on the statement of financial position, increasing both assets and liabilities and therefore affecting gearing.

C is incorrect because tax depreciation (capital allowances) normally remain with the legal owner, the lessor. These benefits are not “passed on” directly, although they may be reflected indirectly in lease pricing.

D is incorrect because maintenance is a feature of operating leases, not finance leases. In a finance lease, the lessee is responsible for maintenance and insurance.

The swap would be shown at fair value in the statement of financial position and the change in value posted to other comprehensive income.

Last year’s profit before interest and tax (PBIT) = $4.0m

Objective: PBIT to increase by 10% →

PBITthis year=4.0×1.10=4.4m\text{PBIT}_{\text{this year}} = 4.0 \times 1.10 = 4.4\text{m}PBITthis year​=4.0×1.10=4.4m

New long-term debt = $2m at 5% interest →

Interest = 2.0×0.05=0.1m2.0 \times 0.05 = 0.1\text{m}2.0×0.05=0.1m

Profit before tax (PBT):

4.4−0.1=4.3m4.4 - 0.1 = 4.3\text{m}4.4−0.1=4.3m

Tax at 20%:

Tax=4.3×0.20=0.86m\text{Tax} = 4.3 \times 0.20 = 0.86\text{m}Tax=4.3×0.20=0.86m

Earnings after tax:

Earnings=4.3−0.86=3.44m\text{Earnings} = 4.3 - 0.86 = 3.44\text{m}Earnings=4.3−0.86=3.44m

Dividend payout ratio = 40% of earnings:

Total dividends=3.44×0.40=1.376m\text{Total dividends} = 3.44 \times 0.40 = 1.376\text{m}Total dividends=3.44×0.40=1.376m

Shares in issue = 2m → Dividend per share:

DPS=1.3762=0.688≈$0.69\text{DPS} = \frac{1.376}{2} = 0.688 \approx \$0.69DPS=21.376​=0.688≈$0.69

So, correct DPS by calculation is about $0.69 per share. Since none of the given options (A–D) equals this, there is likely a typo or omission in the provided options, but the financially correct figure is $0.69.

We need to raise $45m with minimum dilution, so choose the highest price at which there is sufficient demand.

Demand at or above each possible offer price:

$5.00 → 5m shares → $25m (insufficient)

$4.75 → (2 + 5) = 7m shares → 7 × 4.75 = $33.25m (insufficient)

$4.50 → (3 + 2 + 5) = 10m shares → 10 × 4.50 = $45m (exactly enough)

$4.25 or $4.00 would raise more than $45m but require issuing more shares → more dilution.

So the best price that still raises $45m is $4.50.

Answer: A – $4.50

Holding excess cash increases equity (retained earnings) without necessarily increasing profits proportionately. This dilutes returns to shareholders, so ROE falls. Liquidity actually increases, and vulnerability to takeover may fall, not rise.

Reasoning:

A share exchange allows Company B’s shareholders to stay invested and participate in the future gains (synergies, growth) of the combined business.

A is wrong: cash offers are what “realise” an investment and crystallise a capital gain.

B is wrong: a share exchange introduces foreign currency exposure (to A$), whereas a cash offer in B$ does not.

C is wrong: Company B is in the older, more established market, so it is more likely that market is efficient, not Company A’s.

So D is the correct explanation.

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