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CIMA CIMAPRA19-F03-1 Exam Syllabus Topics:

Section	Weight	Objectives
Topic 1: Sources of Long-Term Finance	25%	- Equity finance 1. Types of equity and issue methods 2. Cost of equity and capital structure theories - Debt and hybrid finance 1. Leasing, convertibles, and warrants 2. Types of debt, terms, and covenants - Optimal capital structure 1. Practical determinants of capital structure 2. Impact of gearing on risk and return
Topic 2: Investment Appraisal and Decisions	25%	- Risk analysis in investment decisions 1. Sensitivity, scenario, and simulation analysis 2. Cost of capital estimation and adjustment - Advanced investment appraisal techniques 1. Adjusted present value and real options 2. Discounted cash flow, NPV, IRR, MIRR
Topic 3: Business Valuation	20%	- Pricing and negotiation 1. Post-transaction value creation 2. Determining offer price and terms - Valuation concepts and purposes 1. Valuation for mergers, acquisitions, and disposals 2. Valuation for listing or equity issuance - Valuation methods 1. Asset-based, earnings-based, cash flow-based 2. Relative valuation and market multiples
Topic 4: Financial Risk Management	15%	- Risk mitigation and hedging strategies 1. Internal controls and risk policy frameworks 2. Use of derivatives: forwards, futures, swaps, options - Types and sources of financial risk 1. Credit and liquidity risk 2. Interest rate, foreign exchange, commodity risk - Risk measurement and assessment 1. Value-at-Risk, duration, gap analysis
Topic 5: Financial Policy Decisions	15%	- Strategic financial objectives and governance 1. Agency theory and stakeholder interests 2. Role of financial strategy in overall corporate strategy - Dividend and distribution policy 1. Practical considerations and constraints 2. Theories of dividend relevance

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CIMA F3 Financial Strategy Sample Questions (Q97-Q102):

NEW QUESTION # 97
Company M is a geared company whose equity has a market value of $1,500 million and debt has a market value of S300 million. The company plans to issue $200 million of new shares and use the funds raised to pay off some of the debt Company M currently has a cost of equity of 13% and a WACC of 10% It pays corporate tax at the rate of
30% Company B, an ungeared company operating in the same business sector as Company M, has a cost of equity of 12% Assume Modigliani and Miller's theory of capital structure with tax applies Which calculation below shows the correct approach to calculating the new WACC following the planned changes in capital structure?

Answer: A

Explanation:
To get the new WACC using Modigliani & Miller with tax:Find the ungeared (asset) cost of capital, KuK_uKu.Company B is ungeared and in the same business, so its cost of equity = asset return:Ku=12%K_u
= 12\%Ku=12% Work out the new capital structure after the refinancing.Current equity = $1,500mCurrent debt = $300mNew equity issue = $200m (used to repay debt)New equity E1=1,500+200=1,700E_1 = 1,500 +
200 = 1,700E1=1,500+200=1,700New debt D1=300#200=100D_1 = 300 - 200 = 100D1=300#200=100Total value (using market values) V1=D1+E1=100+1,700=1,800V_1 = D_1 + E_1 = 100 + 1,700 = 1,800 V1=D1+E1=100+1,700=1,800.Apply MM with tax for WACC:WACC=Ku[1#TDV]\text{WACC} = K_u
\left[1 - T \frac{D}{V}\right]WACC=Ku[1#TVD] WACC1=12%[1#0.30×1001,800]\text{WACC}_1 = 12\%
\left[1 - 0.30 \times \frac{100}{1,800}\right]WACC1=12%[1#0.30×1,800100] This gives approximately:12%
×(1#0.0167)#12%×0.9833#11.8%12\% \times (1 - 0.0167) \approx 12\% \times 0.9833 \approx 11.8\%12%× (1#0.0167)#12%×0.9833#11.8% This matches option B: 11.8%=12%×[1#(0.30×100/1,800)]11.8\% = 12\%
\times [1 - (0.30 \times 100 / 1,800)]11.8%=12%×[1#(0.30×100/1,800)].

NEW QUESTION # 98
A company plans to cut its dividend but is concerned that the share price will fall. This demonstrates the _____________ effect

A. B
B. A

Answer: B

NEW QUESTION # 99
G pic wishes to borrow $5 million in 6 months, for a period of 3 months. A bank has quoted the following Forward Rate Agreement (FRA) rales:
3 v 9 6.55%-6.70% 6v9 6.70%-6 90%.
G pic can borrow at 0 75% above base rate, and the base rate is currently 6.25% Concerned that base rates may rise, G pic decides that it will hedge using an FRA At the settlement date for the FRA, the base rate has risen to 7.50% What is the effective interest rate paid by G pic for its borrowing?

A. 7.30
B. 8.25
C. 7.45
D. 7.65

Answer: D

Explanation:
G plc will borrow at base + 0.75% # 7.50% + 0.75% = 8.25%.
To hedge, as a future borrower it uses the 6v9 FRA offer rate = 6.90%.
Difference between actual base and FRA = 7.50% # 6.90% = 0.60%.
Interest difference over 3 months on $5m = 0.006 × ¼ × 5,000,000 = $7,500 (received from FRA).
Net interest paid = 8.25% interest # 0.60% benefit = 7.65% effective rate.

NEW QUESTION # 100
Company M plans to bid for Company J. Company M has 20 million shares in issue and a current share price of $10.00 before publicly announcing the planned takeover. Company J has 10 million shares in issue and a current share price of $4.00.
The directors of Company M are considering an all-share bid of 1 Company M shares for 2 Company J shares.
Synergies worth $20m are expected from the acquisition.
What is the likely change in wealth for Company M's shareholders (in total) if the bid is accepted?
Give your answer to the nearest $ million.
$ ? million

A. $8 million
B. 10m shares at $4 # value = $40mSynergies = $20mOffer: 1 M share for every 2 J shares # new M shares issued = 10m × ½ = 5m.Total M shares after deal = 20m + 5m = 25m.Total combined value (including synergies):200+40+20=260m200 + 40 + 20 = 260\text{m}200+40+20=260m Post- acquisition share price:260/25=10.40260 / 25 = 10.40260/25=10.40 Wealth of original M shareholders after:20m×10.40=208m20m \times 10.40 = 208m20m×10.40=208m Before: 20m × 10 = 200m.Change in wealth = 208m # 200m = $8m.
C. 20m shares at $10 # value = $200m
D. 0

Answer: A,B,C,D

NEW QUESTION # 101
A company gas a large cash balance but its directors have been unable to identify any positive NPV projects to invest in.
Which THREE of the following are advantages of a share repurchase, compared with a one-off large dividend?

A. It returns cash to shareholders so that they can choose hew to spend It
B. It increases the number of shares issue.
C. It means that the company will be able to pay lower total dividends in the future.
D. The shareholder can choose whether to take the cast or not.
E. It will not create an expectation for future increased dividends.

Answer: C,D,E

Explanation:
A). The shareholder can choose whether to take the cash or not.
With a repurchase, shareholders can decide to sell (take cash) or keep their shares. A one-off dividend forces all shareholders to receive cash.
C). It means that the company will be able to pay lower total dividends in the future.
After a buyback there are fewer shares in issue. If the company keeps the same dividend per share, the total dividend outlay falls - good for future cash flow and flexibility.
E). It will not create an expectation for future increased dividends.
A large one-off dividend may be interpreted as a permanent increase, creating pressure to maintain higher payouts. A buyback is seen as a more one-off, discretionary event, so it avoids that expectation.
B is wrong: a repurchase reduces, not increases, shares in issue.
D is not an advantage relative to a dividend - both methods return cash that shareholders can spend as they wish.

NEW QUESTION # 102
......

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