CIMA F3 - Financial Strategy

Semi-strong form efficiency means all publicly available information is already in the share price; only new information about future cash flows or risk will change shareholder wealth.

A positive-NPV project creates new value → share price should rise on announcement.

The other options (unchanged dividend, revaluation, impairment) either convey no new value creation, or even bad news (impairment).

Answer: A. Announcing that a project will be undertaken generating a positive net present value.

Price to buy each target (equity market value):

A = 25

B = 62

C = 67

D = 60 (all $m)

Combined equity value before deducting cash consideration:

Z + A = 620

Z + B = 655

Z + C = 666

Z + D = 652 (all $m)

After paying cash, equity value = “combined value” − “price paid”:

A: 620 − 25 = 595

B: 655 − 62 = 593

C: 666 − 67 = 599

D: 652 − 60 = 592

Best post-acquisition value is with C (599m).

Answer: C – Acquire Company C.

Integrated reporting’s core aim is to support decisions that create value over the short, medium and long term, not just to increase disclosure volume or unify accounting rules.

Answer: B. To support decision making and actions that focus on creating value over the short, medium and long term.

Given:

Shares: 100m; market cap = $500m ⇒ share price = $5.

Target debt-to-equity = 40%; currently 30%.

Equity (market) = 500m

Current debt = 0.30 × 500 = $150m

Target debt = 0.40 × 500 = $200m

⇒ Extra debt capacity = $50m.

Current earnings = $100m.

Last dividend = $1 per share → $100m total.

Objective: increase dividends by at least 10% each year.

No cash reserves.

Options:

A. Share repurchase instead of dividend – violates objective to increase dividends.

B. Increase debt to meet target D/E – raises $50m (exactly what’s needed) and keeps dividend policy intact → Best fit.

C. Cut dividend to $0.50 – directly contradicts dividend growth objective.

D. Hold dividend at $1 for two years – no 10% annual increase, also violates objective.

Answer: B – Increase debt to meet the target debt to equity ratio.

A is false: IFRS 7 applies to all entities that have financial instruments, not just regulated financial institutions.

B is true: IFRS 7 explicitly requires disclosures by class of financial instrument, so users can understand the nature and risks of different categories.

C is false: IFRS 7 requires both qualitative and quantitative disclosures, including carrying amounts, risk exposures, and sensitivity analyses.

D is false: sensitivity analysis is required for market risks (interest rate, currency, other price), not specifically credit risk.

So the correct statement is B.

Notional principal = $200m

Pay fixed 4%, receive floating (6-month risk-free).

For the first 6 months, the floating rate fixed on 1 Jan = 5% p.a.

Difference = 5% − 4% = 1%

Settlement for 6 months:

0.01×200 m×612=$1 000 0000.01 \times 200\,\text{m} \times \frac{6}{12} = \$1\,000\,0000.01×200m×126​=$1000000

Floating > fixed, so the company receives this amount under the swap.

Correct answer: D. $1,000,000 net receipt to the company.

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.

Current rate: 4.3 £/S

Inflation (annual): S = 2.8%, £ = 4.6%.

Approximate 6-month inflation:

S: 1.4%

£: 2.3%

Forward rate (6 months):

F≈4.3×1.0231.014≈4.3387 £/SF \approx 4.3 \times \frac{1.023}{1.014} \approx 4.3387\ \text{£/S}F≈4.3×1.0141.023​≈4.3387 £/S

Payment: 20,000 S

£ value≈20,000×4.3387≈86,774\text{£ value} \approx 20{,}000 \times 4.3387 \approx 86{,}774£ value≈20,000×4.3387≈86,774

Nearest option: £86,760

Correct answer: C. £86,760

CIMA F3 clearly distinguishes between not-for-profit/public sector organisations and for-profit private sector organisations, particularly in relation to objectives, performance measurement, and stakeholder focus.

Statement A – Correct

Clinic A is funded by central government and provides free healthcare. This fits the CIMA F3 definition of a not-for-profit (public sector) organisation, whose primary purpose is service delivery rather than profit generation.

Clinic B is a listed company owned by shareholders and charges patients directly, making it a for-profit organisation.

✔ Therefore, statement A is correct.

Statement B – Incorrect

Maximising shareholder wealth is the primary financial objective only of for-profit companies, such as Clinic B.

Public sector organisations like Clinic A do not have shareholders and therefore cannot have shareholder wealth maximisation as an objective.

✘ Statement B is incorrect.

Statement C – Correct

CIMA F3 teaches that public sector organisations are primarily assessed on value for money, which incorporates:

Economy

Efficiency

Effectiveness

Since Clinic A is government-funded, its performance would be appraised mainly using value-for-money criteria rather than profitability.

✔ Statement C is correct.

Statement D – Incorrect

While Clinic B may consider some non-financial objectives (such as service quality or reputation), its primary objectives are financial, particularly profit and shareholder wealth maximisation.

The statement implies equal weighting, which is inconsistent with CIMA F3 theory.

✘ Statement D is incorrect.

Statement E – Correct

Despite differing ownership and funding, both organisations share the same primary non-financial objective: the provision of quality healthcare.

CIMA F3 highlights that organisations in the same sector often share common service objectives, regardless of profit motive.

✔ Statement E is correct.

Company issues new shares and uses proceeds to repay high-interest debt.

Effects:

Cost of equity (A): financial risk falls as gearing falls → cost of equity is more likely to decrease, not increase.

Number of shares (B): new share issue → increases.

Corporate tax payment (C): interest expense falls, taxable profit rises → tax paid increases.

Gearing (D): debt falls and equity rises → gearing decreases, not increases.

Interest cover (E): operating profit unchanged, interest lower → interest cover increases.

Answer: B, C and E