F3 Exam Dumps - CIMA Strategic Questions and Answers

PPP fails in practice when prices of goods can’t equalise across countries because of frictions or structural differences:

B. Consumer tastes – different baskets of goods, so the “same” price index isn’t really comparable.

D. Import tariffs – artificial price wedges created by governments.

E. Transport costs – make it impossible to arbitrage price differences away fully.

Arbitrage (A) actually helps PPP hold, not prevents it, and differing tax regimes (C) are less central in standard PPP discussions than tariffs and transport.

✅ Answer Q122: B, D, E

Profit after tax in Country Z = ZS20m (tax rate in Z = 30%).

Let pre-tax profit = PPP.

0.7P=20⇒P=200.7≈28.57m ZS0.7P = 20 \Rightarrow P = \frac{20}{0.7} \approx 28.57\text{m ZS}0.7P=20⇒P=0.720​≈28.57m ZS

Country Y’s tax rate = 60%, with full double tax relief.

Total tax on P should be 0.6P0.6P0.6P, so after all tax:

Net profit=0.4P=0.4×28.57≈11.43m ZS\text{Net profit} = 0.4P = 0.4 \times 28.57 \approx 11.43\text{m ZS}Net profit=0.4P=0.4×28.57≈11.43m ZS

Exchange rate: YS1 = ZS5 → 1 ZS = 0.2 YS.

Net profit in YS=11.435≈2.29m YS\text{Net profit in YS} = \frac{11.43}{5} \approx 2.29\text{m YS}Net profit in YS=511.43​≈2.29m YS

Answer: A. YS2.29 million

In CIMA F3, the valuation of a target in an acquisition using P/E multiples is based on the principle that the maximum price a bidder should pay is the value of the target to the bidder, i.e. the value of the target’s earnings when capitalised at the bidder’s P/E ratio if post-acquisition performance is expected to match the bidder’s. When tax is involved, the profits used must be after tax earnings, because the P/E ratio is defined as:

P/E=Market Value of EquityEarnings after tax\text{P/E} = \frac{\text{Market Value of Equity}}{\text{Earnings after tax}}P/E=Earnings after taxMarket Value of Equity​

Step 1 – Convert pre-tax profit to earnings

Company F’s pre-tax profit = $300m.

Corporate tax rate = 30%.

EarningsF=300×(1−0.30)=300×0.70=$210m\text{Earnings}_F = 300 \times (1 - 0.30) = 300 \times 0.70 = \$210\text{m}EarningsF​=300×(1−0.30)=300×0.70=$210m

Step 2 – Apply Company E’s P/E ratio (bootstrapping effect)

Because both firms have similar risk and E believes it can “bootstrap” F’s earnings so that the market values F on E’s P/E of 15:

Value of F to E=EarningsF×P/EE=210×15=$3,150m\text{Value of F to E} = \text{Earnings}_F \times \text{P/E}_E = 210 \times 15 = \$3,150\text{m}Value of F to E=EarningsF​×P/EE​=210×15=$3,150m

This represents the combined value of F’s earnings once integrated into E and re-rated at the higher multiple. Under F3 principles, this figure is the maximum price E should be willing to pay; paying more would destroy value for E’s shareholders because the purchase price would exceed the value created by the acquisition.

Therefore, the maximum offer price to F’s shareholders is:

$3,150 million\boxed{\$3,150\ \text{million}}$3,150 million​

For tax planning and compliance, transfer prices between group companies must follow the arm’s length principle: intra-group prices should be those that would be charged between independent parties in comparable circumstances.

Option D explicitly states this – same price as would be charged to independent supermarkets in that foreign country.

Options B and C suggest manipulating prices based on tax rates, which risks breaching transfer pricing rules. Thin capitalisation (A) is about debt levels, not intra-group pricing. So D is the key factor.

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

Short-term rates slightly above long-term rates = mildly inverted yield curve.

A – This difference may reverse: Correct – the term structure can and does change over time.

B – Currency expected to strengthen long-term: Lower long-term rates imply lower expected long-term inflation, which is consistent with expectations of a stronger currency in the long run.

D – Interest rates are expected to fall: An inverted yield curve usually reflects market expectations that future short-term rates will be lower than today.

C is wrong because rates are not definite to fall, only expected to.

E is wrong: with short-term rates currently higher than long-term, a long-term borrower would not clearly “save” by borrowing short and refinancing; it also adds refinancing risk.

Equity: 400m shares at $3 → $1,200m

Existing debt: $800m

New debt raised: $200m

Project NPV: $100m

Step 1 – Initial firm value:

= 1,200 + 800 = $2,000m

Step 2 – After raising $200m debt and investing in project:

Debt becomes = 800 + 200 = $1,000m

Firm value increases by NPV of 100 → new firm value = 2,000 + 100 = $2,100m

Wait – careful: raising debt also adds cash before investment, then project adds NPV:

After raising debt: 2,000 + 200 = 2,200

After investing in project with NPV 100: +100 → 2,300m total firm value

So final:

Firm value = 2,300m

Debt = 1,000m

Equity (by MV) = 2,300 – 1,000 = 1,300m

Step 3 – Gearing ratio (market value):

Gearing = Debt / (Debt + Equity)

= 1,000 / (1,000 + 1,300)

= 1,000 / 2,300 ≈ 43.48%

To avoid an immediate breach, the bank’s maximum gearing must be at least above 43.48%.

The lowest option that does this is 44%.

A – Quality of current management: affects risk of default and how well the business is run.

B – Current gearing ratio: shows how much existing leverage there is and the risk of over-gearing.

E – Interest cover on existing debt: key indicator of the firm’s ability to service interest payments.

EPS (C) and dividend cover (D) are more relevant to equity investors than to new long-term lenders.

Newly established, unincorporated service entity → focuses on growth, service quality and staying liquid; dividends and optimal capital structure are not primary yet.

Answer: B, C, D