F3 Exam Dumps - CIMA Strategic Questions and Answers

In lease vs buy decisions, the relevant risk is essentially that of secured debt, and the cash flows (lease payments, tax shields, loan repayments) are after tax. Therefore, you discount incremental cash flows at the after-tax cost of borrowing, not WACC or cost of equity.

A. “A bond issuer must appoint at least one market-maker…” – TRUE (in exam context)

On public bond markets, an issuer typically works with one or more banks/dealers as market-makers. Their role is to quote buy and sell prices and help ensure liquidity so investors can trade in and out. From an exam perspective, this is treated as a standard feature of traded corporate/government bonds.

B. “The redemption yield… can be determined by calculating the internal rate of return…” – TRUE

The redemption yield (yield to maturity) is exactly the IRR of the bond’s cash flows (all coupon payments plus redemption amount) based on the current market price. That’s standard CIMA F3 territory.

C. “Investors in traded bonds have an ownership stake…” – FALSE

Bondholders are creditors, not owners. They have a contractual right to interest and principal, but no equity participation, voting rights, or residual claim (except in liquidation after other priorities).

D. “A first-time bond issuer will find it easier to issue bonds than arrange a conventional term loan.” – FALSE

It’s usually the opposite. For a new issuer, arranging a bank term loan is typically quicker and simpler than accessing the bond market, which involves credit ratings, documentation, listing and investor marketing.

E. “Governments are the most frequent issuers of bonds…” – TRUE

Governments regularly issue sovereign bonds (treasuries, gilts, etc.) both to finance spending and to roll over existing national debt. This is exactly how public deficits are funded in practice and is a standard statement in financial strategy texts.

Hence: A, B and E.

In CIMA F3, a money market hedge is a contractual-style hedge created using the spot rate today plus borrowing/lending in the two currencies to lock in a known domestic-currency outcome for a future foreign-currency receipt or payment. Under interest rate parity, the synthetic forward rate implied by money-market borrowing and lending is broadly consistent with the forward market, so the hedge typically delivers roughly the same outcome as a forward contract (A). Unlike leaving the position unhedged, the money market hedge does not leave the company exposed to currency risk once set up because the future cash flows are effectively fixed through today’s borrow/lend transactions (so B is false). Because a money market hedge can be tailored using available loan/deposit maturities and amounts (and can sometimes be implemented when a forward is unavailable or less convenient), it may be a little more flexible than a forward in practical terms (C). However, it requires multiple steps—borrow or invest, convert at spot, and invest/repay—so it is more complex than a forward contract (D). “Easy to set up” is not usually considered a defining advantage versus forwards because it depends on access to credit lines and money-market instruments (so E is not selected).

A residual dividend policy pays dividends only after all positive-NPV projects are funded – typical for firms whose investors want growth rather than income.

C is a small listed company whose investors seek maximum capital growth → classic residual policy case.

Answer: C. Entity C

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.

A. Equity instead of debt reduces financial risk → ✅ True

B. Equity will create pressure for higher future DPS → too strong / not necessarily always → ❌

C. Debt always increases EPS → only if returns > cost of debt → ❌

D. Retained earnings is the cheapest form of equity finance (no issue costs) → ✅ True

E. More debt → higher financial risk → higher cost of equity (MM with gearing) → ✅ True

F. Debt is always preferable → clearly ❌

Correct three:

A, D, E\boxed{A,\ D,\ E}A, D, E​

B. Tax relief on lease payments have not been lagged correctly – ERROR

Tax is paid one year after the year to which it relates. Lease rentals in each project year (1–4) give tax relief in years 2–5. In the appraisal, the tax relief on lease payments is shown too early (years 1–4), so the lag is wrong.

C. Using the 10% discount rate is incorrect – ERROR

A lease-versus-buy comparison should discount finance cash flows at the after-tax cost of borrowing, not the nominal interest rate. Here, the after-tax cost of debt is:

10%×(1−0.20)=8%10\% \times (1 - 0.20) = 8\%10%×(1−0.20)=8%

So using 10% is an error.

F. The salvage value has been included within the lease option – ERROR

Under an operating lease the asset is not owned by the lessee, so it does not receive the $100,000 residual value. Including a salvage value in the leasing case is therefore incorrect.

Options D and E are not errors (operating cash flows and specific loan repayments are rightly excluded), and the timing of the lease payments themselves (A) is correct.

A – Access to technical expertise: Q’s staff are leading experts and human capital is very valuable; acquiring this is a clear benefit.

D – Gain economies of scale: Both firms operate in the same technical service industry, so combining operations can reduce average costs and share overheads.

E – Improve EPS: Q has shown consistent earnings growth; if acquired at a reasonable price, this growth can enhance M’s earnings and potentially its EPS.

Diversification benefits (B) are limited because they are in the same industry, and intangible assets such as human capital are not strong collateral for borrowing (C).

CIMA F3 covers takeover defences under Mergers and Acquisitions and Corporate Governance. A crucial distinction is made between legitimate post-offer defences, which are actions taken after a bid has been announced and are consistent with directors’ fiduciary duties, and illegitimate or unethical actions, which may mislead shareholders or breach takeover regulations.

Once a bid is hostile, the directors of the target company (Company B) are required under governance principles emphasised in F3 to act in the best interests of shareholders, not merely to preserve their own positions.

Option A is a legitimate defence.

Having the company’s assets independently and professionally revalued is acceptable and encouraged under CIMA F3. This provides shareholders with objective evidence that the bid undervalues the company and supports informed decision-making without misleading the market.

Option C is a legitimate defence.

Making a counter-bid (often called a “Pac-Man defence”) is permitted provided it can be justified as enhancing shareholder wealth. CIMA F3 stresses that directors may pursue alternative strategic actions if they genuinely believe these will create greater value for shareholders than accepting the hostile offer.

Option E is a legitimate defence.

Referring the bid to competition authorities is allowed where there are genuine competition concerns. CIMA F3 notes that regulatory intervention is an appropriate and lawful route if the acquisition may breach competition law or significantly reduce market competition.

The remaining options are not legitimate:

B is not allowed post-offer, as changing the articles to block a bid breaches takeover rules and shareholder rights.

D is unethical and unlawful, as knowingly publishing misleading forecasts violates disclosure requirements and directors’ duties.

✅ Final Answer: A, C and E