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CIMA CIMAPRA19-F03-1 Exam Syllabus Topics:

Section	Weight	Objectives
Topic 1: Financial Risks	20%	- Currency Risk Management 1. Translation exposure 2. Hedging techniques 3. Transaction exposure - Interest Rate Risk Management 1. Interest rate exposure 2. Forward rate agreements 3. Interest rate derivatives - Risk Identification and Assessment 1. Market risk 2. Credit risk 3. Liquidity risk
Topic 2: Sources of Long-Term Funds	25%	- Debt Finance 1. Bank borrowing 2. Lease finance 3. Loan notes and bonds - Capital Structure and Dividend Policy 1. Capital structure theories 2. Dividend policy theories 3. Cost of capital - Equity Finance 1. Rights issues 2. Private placements 3. Ordinary shares
Topic 3: Financial Policy Decisions	15%	- Strategic Financial Objectives 1. Shareholder wealth maximization 2. Stakeholder objectives 3. Financial and non-financial objectives - Development of Financial Strategy 1. Investment decisions 2. Financing decisions 3. Dividend decisions
Topic 4: Business Valuation	40%	- Post-Transaction Issues 1. Performance monitoring 2. Integration planning 3. Value realization - Mergers and Acquisitions 1. Financial implications 2. Strategic rationale 3. Acquisition financing - Business Valuation Techniques 1. Earnings and market-based valuation 2. Asset-based valuation 3. Discounted cash flow valuation

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F3 Financial Strategy study guide: exam CIMAPRA19-F03-1 real vce collection

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CIMA F3 Financial Strategy Sample Questions (Q173-Q178):

NEW QUESTION # 173
An entity prepares financial statements to 30 June.
During the year ended 30 June 20X2 the following events occurred:
1 July 20X1
* The entitiy borrowed $100 million at a variable rate of interest.
* In order to protect itself against the variability of its interest cashflows, the entity entered into a pay-fixed-receive-variable interest swap with annual settlements. The fair value of the swap on this date was zero.
30 June 20X2
* The entity received a net settlement of $2 million under the swap. After this net settlement, the fair value of the swap was $5 million - a financial asset.
The entity decides to use hedge accounting for this arrangement and has designated it as a cash flow hedge.
The swap is a perfect hedge of the variability of the cash interest payments.
Which of the following describes the treatment of the settlement and the change in the fair value of the swap in the statement of profit or loss and other comprehensive income for the year ended 30 June 20X2?

A. $7 million is recognised in other comprehensive income.
B. $2 million is recognised in profit or loss and $5 million is recognised in other comprehensive income.
C. $7 million is recognised in profit or loss.
D. $5 million is recognised in profit or loss and $2 million is recognised in other comprehensive income.

Answer: B

NEW QUESTION # 174
A listed publishing company owns a subsidiary company whose business activity is training.
It wishes to dispose of the subsidiary company.
The following information is available:

The board of the publishing company believe that the value of the subsidiary company, and hence the value of the equity invested in it, can be determined by calculating the present value of the subsidiary's free cashflows.
Which of the following is the most appropriate discount rate to use when determining the enterprise value of the company?

A. A cost of equity that reflects the asset beta of a listed company that provides training activities.
B. A WACC that reflects the gearing of the subsidiary company and the asset beta of a listed company that provides training activities.
C. A WACC that reflects the gearing of the publishing company and the asset beta of a listed company that provides training activities.
D. A WACC that the reflects the gearing of the publishing company and the equity beta factor of the publishing company.

Answer: C

NEW QUESTION # 175
Company U has made a bid for the entire share capital of Company B.
Company U is offering the shareholders in Company B the option of either a share exchange or a cash alternative.
Advise the shareholders in Company B which THREE of the following would be considered disadvantages of accepting the cash consideration?

A. Cash consideration is certain whereas Company U's future share price performance is uncertain.
B. There will be no opportunity to participate in the future economic success of Company U.
C. Taxation is payable on realised capital gains.
D. Interest rates on deposit accounts are currently at a historic low and are expected to remain low.
E. Company U is not expected to change its dividend policy post-acquisition.

Answer: B,C,D

NEW QUESTION # 176
A company has a cash surplus which it wishes to distribute to shareholders by a share repurchase rather than paying a special dividend.
Which THREE of the following statements are correct?

A. The payment of a special dividend could raise shareholders' expectations of similar distributions in the future, unlike a share repurchase.
B. The share repurchase, if approved by the shareholders, will be binding on all of the company's shareholders.
C. Determination of the repurchase price will be easy as shareholders will insist on receiving the open market price.
D. The share repurchase could send a negative signal to shareholders as it could be interpreted as a failure of management to find suitable investment opportunities.
E. Different tax regimes could result in shareholders having a preference for a share repurchase due to the often more preferential tax treatment of capital gains.

Answer: A,D,E

Explanation:
A - True. A special dividend can create expectations of similar future payouts, while a buyback is more clearly one-off.
B - True. A repurchase can be interpreted by some investors as management having no positive-NPV projects, i.e. a possible negative signal about growth opportunities.
C - False. The repurchase price is not automatically the open-market price; it may involve negotiation or a premium/discount.
D - True. In many tax regimes, capital gains (from buybacks) are taxed more favourably than dividend income, so some shareholders may prefer repurchases.
E - False. Even if approved, individual shareholders are usually free to choose whether or not to tender their shares.

NEW QUESTION # 177
An all equity financed company reported earnings for the year ending 31 December 20X1 of $5 million.
One of its financial objectives is to increase earnings by 5% each year.
In the year ending 31 December 20X2 it financed a project by issuing a bond with a $1 million nominal value and a coupon rate of 7%.
The company pays corporate income tax at 30%.
If the company is to achieve its earnings target for the year ending 31 December 20X2, what is the minimum operating profit (profit before interest and tax) that it must achieve?

A. $7.57 million
B. $7.50 million
C. $5.25 million
D. $8.40 million

Answer: A

Explanation:
Target earnings (after tax) with 5% growth:
5.0×1.05=5.25 million5.0 \times 1.05 = 5.25 \text{ million}5.0×1.05=5.25 million Let required operating profit (PBIT) be XXX.
Interest on bond = 7% × 1m = 0.07m
Profit before tax = X#0.07X - 0.07X#0.07
Tax = 30%, so profit after tax:
Earnings=(X#0.07)×(1#0.30)=0.70(X#0.07)\text{Earnings} = (X - 0.07) \times (1 - 0.30) = 0.70(X - 0.07) Earnings=(X#0.07)×(1#0.30)=0.70(X#0.07) Set equal to earnings target:
0.70(X#0.07)=5.250.70(X - 0.07) = 5.250.70(X#0.07)=5.25 X#0.07=5.250.70=7.50X - 0.07 = \frac{5.25}
{0.70} = 7.50X#0.07=0.705.25=7.50 X=7.50+0.07=7.57 millionX = 7.50 + 0.07 = 7.57 \text{ million}X=7.
50+0.07=7.57 million
So the minimum required operating profit is $7.57m (C).

NEW QUESTION # 178
......

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