F3 CIMA Financial Strategy Free Practice Exam Questions (2026 Updated)

Competition authorities focus on market power and the potential for abuse of a dominant position.

A is most concerning: raising prices on routes where there are no competing operators suggests the merged entity could exploit monopoly power.

B, C and D relate more to service rationalisation, disclosure/insider issues, and employment, which are not the core focus of competition law.

The IIRC’s Integrated Reporting Framework is about showing how an organisation creates value over short, medium and long term, not just financial but using all capitals.

Once Division B is sold, Division A becomes heavily reliant on B as a major external customer. If the new owner reduces purchases or switches supplier, Division A’s volumes and viability are at risk. That makes:

C. Division A's going concern is highly dependent on its relationship with Division B – the main risk.

MAN wants to expand internationally, especially into country P and to access a more global customer base.

Option B gives MAN:

A company physically located in country P, already operating in that market.

An established global customer base, which matches the strategic objective.

The question tells us that country P has:

The same language as M

Free movement of labour from M

No exchange controls or withholding tax

A favourable double tax treaty

→ So there are few barriers to owning and managing a business based in country P.

Options A and C are both based in country M, so they don’t give MAN a direct base in country P.

Option D is based in P but with a large proportion of customers in M, which doesn’t meet the aim of expanding into P and globally.

So, B best fits MAN’s strategic aim with manageable extra risk.

A. An IPO is normally underwritten – Correct. For a fixed-price IPO, underwriters usually guarantee that the issue will be taken up, giving certainty of proceeds.

B. The government will receive significant financial resources from the sale – Correct. In a privatisation, the government is selling its ownership stake; the cash from selling these shares flows to the government.

C. The national airline employees will no longer be public sector employees – Correct. Once privatised, the airline becomes a private-sector company; its staff cease to be public-sector employees.

D is incorrect: a fixed-price offer does not guarantee maximum proceeds – the shares are often deliberately underpriced to ensure the issue is fully subscribed.

E is incorrect: in this scenario the proceeds go to the government as seller of existing shares, not directly to the airline itself.

For WWW (geared 1:3 debt:equity):

D/E=1/3D/E = 1/3D/E=1/3

Let E=3xE = 3xE=3x, D=xD = xD=x ⇒ V=4xV = 4xV=4x

E/V=3/4=0.75E/V = 3/4 = 0.75E/V=3/4=0.75, D/V=1/4=0.25D/V = 1/4 = 0.25D/V=1/4=0.25

Cost of debt Kd=6%K_d = 6\%Kd​=6%

Unlevered cost relation:

Ku=EVKe+DVKdK_u = \frac{E}{V}K_e + \frac{D}{V}K_dKu​=VE​Ke​+VD​Kd​ 0.15=0.75Ke+0.25×0.060.15 = 0.75K_e + 0.25 \times 0.060.15=0.75Ke​+0.25×0.06 0.15=0.75Ke+0.0150.15 = 0.75K_e + 0.0150.15=0.75Ke​+0.015 0.75Ke=0.135⇒Ke=0.1350.75=0.18=18%0.75K_e = 0.135 \Rightarrow K_e = \frac{0.135}{0.75} = 0.18 = 18\%0.75Ke​=0.135⇒Ke​=0.750.135​=0.18=18%

Answer: B. 18.0%

Advantages of a debt-funded cash offer vs a share exchange:

A. Shareholder control will remain with AB’s current shareholders.

B. More of the synergistic benefits will accrue to AB’s current shareholders.

D. EPS will increase (no dilution of equity; if synergies materialise, earnings are spread over the same number of shares).

Answer: A, B, D

CIMA F3 examines acquisition financing choices under Financial Policy Decisions and Mergers and Acquisitions, with a particular focus on how cash offers versus share exchanges affect shareholder wealth, control, gearing and earnings. The key issue from the perspective of Company AB’s shareholders is whether the method of financing enhances shareholder value without undermining the firm’s optimal capital structure.

A debt-funded cash offer involves Company AB raising debt to pay cash to the shareholders of Company DC. In contrast, a share exchange issues new equity, diluting existing ownership.

Option A is an advantage.

CIMA F3 highlights that a cash offer allows existing shareholders to retain control, because no new shares are issued. With a share exchange, ownership and voting power are diluted as DC’s shareholders become part-owners of the combined company.

Option B is an advantage.

Under a cash offer, all future synergies accrue to AB’s existing shareholders. F3 explains that with a share exchange, synergy benefits are shared with the target’s shareholders through their new equity stake. Therefore, a debt-funded cash offer concentrates the upside of synergies with the acquirer’s shareholders.

Option D is an advantage.

CIMA F3 notes that debt financing can lead to EPS growth, provided the return on the acquisition exceeds the cost of debt. Because no new equity is issued, earnings are spread over the same number of shares, and financial gearing magnifies returns to equity holders.

The remaining options are not advantages:

C (Gearing will increase) is a consequence, not an advantage. Since AB is already at its optimum capital structure, higher gearing increases financial risk.

E is incorrect; increasing WACC would reduce shareholder value, not enhance it.

They care most about ability to service debt and their security:

A: Cash flow forecasts – show ability to meet interest and principal. ✅

B: Current capital structure – shows gearing, ranking of claims, overall risk. ✅

E: Book value of assets – relevant as potential security / collateral. ✅

Answer: A, B, E

Under typical takeover regulation and CIMA F3 principles, the following are legitimate post-offer defences:

A. Independent professional revaluation of assets

This is legitimate: providing better information to shareholders to show that the bid undervalues the company.

C. Make a counter-bid for Company A (a “Pac-Man defence”)

This is acceptable if it can be justified as enhancing shareholder wealth.

E. Refer the bid to competition authorities

It is a legitimate defence to challenge the bid on competition/antitrust grounds if it may reduce competition.

In contrast:

B (altering the articles to change acceptance thresholds mid-bid) is a classic frustrating action, usually not allowed without shareholder approval during an offer period.

D (publishing knowingly unrealistic optimistic forecasts) is misleading and not permitted under market and takeover rules.

$2 million is recognised in profit or loss and $5 million is recognised in other comprehensive income.

This is a cash flow hedge of variable interest payments.

Under IFRS 9, the net swap settlements (the “interest leg”) are taken to profit or loss to adjust the interest expense on the borrowing → $2m in P&L.

The change in fair value of the swap that is an effective hedge of future cash flows is recorded in OCI → total gain on swap is $2m (cash received) + $5m (closing FV asset) = $7m; we’ve already put $2m in P&L, so the remaining $5m goes to OCI as a cash flow hedge reserve.

Earnings attributable to ordinary shareholders = profit after preference dividend = $500m.

Current number of shares = 1,250m.

Current EPS = 500 / 1,250 = $0.40 per share.

Share repurchase: 20% of 1,250m = 250m shares bought back and cancelled.

New number of shares = 1,250m − 250m = 1,000m shares.

Assuming profit is unchanged:

New EPS = 500 / 1,000 = $0.50 per share.

Increase in EPS = 0.50 − 0.40 = $0.10 → $0.100.

Most suitable valuation method for an unlisted company that has only recently made a (small) loss and has very irregular dividends is an earnings-based multiple using comparables, not a dividend model or pure asset valuation.

Answer: D – The P/E method, adjusting the P/E of a listed company downwards to reflect R’s unlisted status.

Company B (all equity):

Cost of equity = asset return = Ku = 17%

Company A:

Gearing D:E = 1:2 → D/E = 0.5

Pre-tax cost of debt Kd = 7%

Tax rate T = 30%

Levered cost of equity with tax:

Ke=Ku+DE(1−T)(Ku−Kd)K_e = K_u + \frac{D}{E}(1 - T)(K_u - K_d)Ke​=Ku​+ED​(1−T)(Ku​−Kd​) Ke=17%+0.5×0.7×(17%−7%)=17%+0.5×0.7×10%=17%+3.5%=20.5%K_e = 17\% + 0.5 \times 0.7 \times (17\% - 7\%) = 17\% + 0.5 \times 0.7 \times 10\% = 17\% + 3.5\% = 20.5\%Ke​=17%+0.5×0.7×(17%−7%)=17%+0.5×0.7×10%=17%+3.5%=20.5%

✅ Correct: A. 20.5%

If the company switches from a residual dividend policy to a stable, growing dividend and increases its use of debt:

A. This does signal to the market that the company may be entering a more stable, mature growth phase – True.

B. A more stable dividend stream can attract a different type of investor (clientele effect) – True.

C. Directors still need to consider shareholder preferences; this statement is incorrect – False.

D. Retained earnings have an opportunity cost equal to the cost of equity and are generally not cheaper than debt – False.

E. More debt increases financial gearing and therefore financial risk – True.

Answer (200273):

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

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 company financed by both equity and debt (the whole firm) is valued using free cash flow to the firm (before interest) discounted at the WACC.

So the correct combination is:

Free cash flow before interest at WACC → A.

The other options mismatch cash flow type and discount rate (either equity-only or post-interest flows).

In a merger of two listed companies in the same industry, CIMA F3 highlights several typical post-merger outcomes:

A. Increase in customer base – The combined entity now serves the customers of both legacy firms, usually increasing total customer reach and market share.

C. Decrease in employee motivation due to internal changes – Mergers often create uncertainty, restructuring, cultural clashes and role changes, which can reduce morale and motivation, at least in the short term.

D. Changes to supplier relationships owing to internal changes – A larger merged company often renegotiates supply contracts, consolidates suppliers or changes volumes, so relationships and terms are likely to change.

E. Cost savings from synergistic benefits and economies of scale – This is one of the main motives for mergers: eliminating duplication, spreading fixed costs, consolidating operations, and gaining purchasing power.

Option B (competition authorities step in to stop a potential price monopoly) is not something that will necessarily or likely occur after the merger; it may happen in some extreme cases and typically occurs before completion, so it’s not treated as a standard outcome.

So the most appropriate outcomes are: A, C, D and E.