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

CIMA F3 places strong emphasis on post-merger integration (PMI) as a critical determinant of whether expected synergies from an acquisition are actually realised. The syllabus highlights that although financial and operational synergies may appear attractive at the appraisal stage, the effective integration of systems, processes and controls is often the greatest practical challenge after completion.

In this scenario, Company A and Company B operate in the same industry and at the same level of the supply chain (horizontal integration), and the anticipated synergies relate to management cost savings, warehousing efficiencies and bulk purchasing economies. For these synergies to be achieved, Company A must be able to accurately measure performance, control costs, manage inventory, and coordinate purchasing decisions across the enlarged group. CIMA F3 study guidance stresses that this requires a clear understanding of the acquired company’s management information system (MIS).

Option B is therefore the most important issue. Without understanding Company B’s MIS, Company A will struggle to:

Identify genuine cost-saving opportunities,

Integrate inventory and warehousing systems,

Align purchasing data to exploit economies of scale,

Monitor operational performance consistently post-acquisition.

The other options, while relevant, are secondary:

A (removing surplus staff) is a consequence of integration, not the primary enabling issue.

C (customer discussions) is less critical here because both firms already operate in the same wholesale market with similar customers.

D is not a strategic financial or operational issue under CIMA F3 and is therefore irrelevant.

CIMA F3 consistently emphasises that information systems integration underpins successful post-merger synergy realisation, making option B the correct answer.

In a semi-strong efficient market, today’s share price already reflects all publicly available information, including the news about the successful new phone and revised growth forecasts. So the best estimate of equity value today is simply:

Market cap=Current share price×number of shares\text{Market cap} = \text{Current share price} \times \text{number of shares}Market cap=Current share price×number of shares

No adjustment for retained earnings, and no need to redo valuation models if the market is semi-strong efficient.

Answer: B: Today’s share price × number of shares in issue.

PPP says identical goods should cost the same when prices are expressed in a common currency, but in reality transport costs, taxes, tariffs, and market imperfections can allow differences to persist.

Answer: C. Economic forces should eliminate the price difference, but imperfections may permit it to persist.

For reviewing the effectiveness of hospital services, the focus is on quality of care and outcomes:

A. Proportion of surgical procedures successful – direct clinical effectiveness measure ✅

B. Average waiting times for treatment – key access and service delivery metric ✅

C. Patient satisfaction ratings – captures perceived quality and experience ✅

Options D (staff costs) and E (car park revenue) are financial/operational efficiency measures, not direct indicators of service effectiveness, so they are less relevant here.

Thin capitalisation rules in Country B restrict tax relief on excessive interest deductions of companies resident there. That means they limit deductions for:

Interest paid by BB, the subsidiary in Country B.

Answer: C. Interest paid by BB

Quick explanation:

A. True – A positive (or affirmative) covenant requires the borrower to do certain things (e.g. maintain insurance, provide financial statements).

B. False – Covenants are contractually binding; breaching them can trigger penalties or default.

C. True – A restrictive (or negative) covenant prevents the company from taking certain actions (like raising more debt, selling key assets) without lender consent.

D. False – That describes a conversion option or convertible debt, not a standard covenant.

E. True – A financial covenant typically sets financial ratio targets (e.g. interest cover, gearing) that must be maintained.

✅ Correct: A, C, E

A – Integrated reporting is designed to improve the quality of information for providers of financial capital.

B – A core aim is to show the interdependencies between the different capitals (financial, manufactured, human, social, natural, intellectual).

E – It explicitly aims to support integrated decision-making and value creation over the short, medium and long term.

C is wrong (it usually increases work), and D is wrong (focus is long-term, not short-term).

Step 1 – Work out the current P/E of Company A

From the table:

Share price A = $5.00

EPS A = $0.40

P/EA=PriceEPS=5.000.40=12.5\text{P/E}_A = \frac{\text{Price}}{\text{EPS}} = \frac{5.00}{0.40} = 12.5P/EA​=EPSPrice​=0.405.00​=12.5

So A trades on a P/E of 12.5.

Step 2 – Calculate A’s and B’s current earnings

A’s shares = 20m → Earnings A = 0.40 × 20m = $8m

B’s shares = 14m → Earnings B = 0.50 × 14m = $7m

Current equity value of A (check):

8m×12.5=100m(matches 5×20)8m \times 12.5 = 100m \quad (\text{matches } 5 \times 20)8m×12.5=100m(matches 5×20)

Step 3 – Revalue B using A’s P/E after acquisition

Company A believes that after acquisition, the combined group will be seen as having the same P/E as A (12.5).

So the value of B’s earnings inside the merged group is:

Value of B in merged group=7m×12.5=87.5m\text{Value of B in merged group} = 7m \times 12.5 = 87.5mValue of B in merged group=7m×12.5=87.5m

Step 4 – Value of A after paying for B in cash

To get the post-acquisition value to A’s shareholders, take:

Post-acquisition value=Current value of A⏟100m+Value of B in merged group⏟87.5m−Cash paid for B⏟65m\text{Post-acquisition value} = \underbrace{\text{Current value of A}}_{100m} + \underbrace{\text{Value of B in merged group}}_{87.5m} - \underbrace{\text{Cash paid for B}}_{65m}Post-acquisition value=100mCurrent value of A​​+87.5mValue of B in merged group​​−65mCash paid for B​​ =100+87.5−65=122.5 million= 100 + 87.5 - 65 = 122.5\ \text{million}=100+87.5−65=122.5 million

So Company A expects the value of the merged entity (i.e. A after acquiring B for cash) to be:

$122.5 million\boxed{\$122.5\ \text{million}}$122.5 million​

Correct option: A. $122.5 million

This is the appropriate, code-compliant defence: communicate with shareholders, explain the company’s prospects (including use of cash for an acquisition) and why the bid undervalues the firm. The other options either breach takeover-code norms or are not well-justified.

A. The issue of bonds might limit the availability of debt finance in the future.

If the project is financed by a bond, gearing rises to 2:5, increasing financial risk and using up debt capacity. A rights issue instead reduces gearing to 1:5, preserving future borrowing capacity.

C. The rights issue will lead to less pressure on the operating cash flows of the programme.

Bond finance requires fixed interest payments (and eventual redemption), which must be met regardless of project cash flow variability. Equity raised via a rights issue has no mandatory interest and dividends are discretionary, so it places less strain on operating cash flows.

So the answer is:

Answer: A and C

Holding excess cash increases equity (retained earnings) without necessarily increasing profits proportionately. This dilutes returns to shareholders, so ROE falls. Liquidity actually increases, and vulnerability to takeover may fall, not rise.

The regulator has been asked to see whether competition is being distorted by a dominant firm. Under competition / antitrust principles, regulators normally look at:

Profits (A): persistently high profits may indicate market power or abuse of dominance.

Market shares (B): high and stable market share for one firm can signal dominance and lack of effective competition.

Prices across the industry (C): higher-than-expected or similar prices between competitors may indicate weak competition or collusion.

Entry barriers (E): high barriers (e.g. licences, regulation, capital intensity, brand strength) reduce competitive pressure and help a dominant firm maintain power.

Medical treatment efficacy (D) relates to quality of clinical outcomes, which is important for health regulators, but it is not primarily a competition issue, so it’s less relevant to whether the market is operating “fairly” in a competition sense.

Compared with a share repurchase, a one-off special dividend:

is administratively simpler to arrange,

returns surplus cash directly to shareholders (all shareholders receive cash, ownership proportions are unchanged).

Answers: D and E

At the rumour stage (pre-bid), suitable defences are pre-emptive ones:

A – Communicate effectively with shareholders: build support and explain strategy to keep the share price fair and reduce vulnerability.

B – Revalue non-current assets: helps ensure the shares are not undervalued and makes any bid look less attractive.

D – Poison pill: introduce mechanisms (e.g. rights issues to existing shareholders) that make a hostile bid very costly.

C (competition authorities) and E (white knight) are reactive and typically used only once an actual bid has been made.

Applying hedge accounting will better match the gains/losses on hedging instruments with the underlying forecast revenues, reducing artificial volatility in reported profit. This makes the performance figures more representative and therefore easier for the market to analyse and value when the company lists.

Option D is weaker because hedge accounting is optional under IFRS, and A and C do not address the key issue of earnings volatility and future market valuation.

 A – Founders’ pension/income adequacy is important in a closely held, owner-managed firm.

 C – Their future cash needs are central to dividend decisions.

 E – Personal tax position of the (few) shareholders is very relevant.

Before announcement:

Equity = 4m shares × $4.0 = $16m

Debt = $7m

Gearing = 7 / 16 = 43.75% → already above 40%.

After additional $2m debt and higher share price:

Debt = 7 + 2 = $9m

Equity = 4m × $4.2 = $16.8m

Gearing = 9 / 16.8 ≈ 53.6% → even further above the 40% ceiling.

So the gearing objective is exceeded both before and after, and gearing rises.