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

A net asset valuation is based mainly on the book value of tangible and recognised intangible assets in the statement of financial position. In a consultancy company, most of the value lies in human capital, know-how, reputation, client relationships, etc. These are usually not recognised as assets under accounting rules (they’re internally generated intangibles).

So a net asset basis would seriously understate the true value of the company because it effectively ignores the main value driver. That’s why:

A is correct – it does not account for the intangible assets (like human capital).

B and C are wrong – most of these intangibles aren’t even on the balance sheet, so they aren’t valued at historical or NRV.

D is wrong – tangible assets are included; the problem is that they are relatively unimportant here.

NNN is financed by both equity and debt, and the directors specifically want the value of the equity. Valid approaches are:

A. Total earnings × P/E ratio – Correct

Using a suitable sector or market price–earnings multiple and multiplying by NNN’s earnings gives an estimate of the equity value directly.

B. Cash flow to all investors discounted at WACC less the value of debt – Correct

Discounting free cash flow to the firm (to all investors) at the WACC gives the enterprise value (debt + equity). Subtracting the market value of debt then leaves an estimate of the equity value.

C. Cash flow to all investors discounted at WACC – Not sufficient

This gives the total firm value, not just the equity. On its own, it doesn’t answer the question.

D. Cash flow to equity discounted at the cost of equity less the value of debt – Incorrect

Discounting cash flow to equity at the cost of equity already produces equity value. Subtracting debt again would be conceptually wrong (double counting).

E. Cash flow to equity discounted at the cost of equity – Correct

This is the standard free cash flow to equity (FCFE) valuation method and directly yields the value of equity.

So the appropriate methods here are A, B and E.

Disadvantages of accepting cash for ZYY’s shareholders:

A. Low interest rates – cash reinvested in deposits earns little.

B. Capital gains tax is crystallised on disposal.

E. No chance to share in YZZ’s future growth once they’ve taken cash.

C and D are not disadvantages of cash (D is actually an advantage: certainty).

Correct answer: D. Companies A and B have the same business risk

Business risk is measured by asset beta.

A and B both have asset beta = 1.16, so same business risk.

C has higher asset beta (1.20), so highest business risk.

Differences in borrowing costs:

VVV:

Floating: rf + 3%

Fixed: 7%

Counterparty:

Floating: rf + 1%

Fixed: 8%

Relative advantages:

Counterparty is 2% cheaper in floating (rf+1 vs rf+3).

VVV is 1% cheaper in fixed (7 vs 8).

Many CIMA questions treat total potential saving from the swap as the sum of these advantages:

2% + 1% = 3% total savings.

Bank takes 10% ⇒ 0.3%.

Remaining savings = 3% − 0.3% = 2.7%, shared equally ⇒ 1.35% each.

VVV wants fixed; its direct fixed borrowing cost is 7%, so its effective fixed rate after sharing the savings:

7% − 1.35% = 5.65%.

Answer: B – VVV would pay 5.65%.

 A – Correct definition of natural capital under .

 C – States the primary purpose correctly: explaining value creation over time to providers of financial capital.

 D – Sustainability information is a key component of an integrated report.

 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.

Profit after preference dividend = $400m

Shares currently in issue = 2,000m

Current EPS = 400 / 2,000 = $0.20

Repurchase: 20% of 2,000m = 400m shares → new shares = 1,600m

New EPS = 400 / 1,600 = $0.25

Increase in EPS = 0.25 − 0.20 = $0.05

Answer: A. $0.050

Delta: 12% fixed or rf + 3% floating

Kappa: 15% fixed or rf + 4% floating

Delta’s advantage:

Fixed: 3% better (15 − 12)

Floating: 1% better (rf+4 − (rf+3))

Comparative advantage is in fixed; total potential gain from a swap = 3% − 1% = 2%, shared equally → 1% saving each.

So:

Delta (wants floating): (rf + 3%) − 1% = rf + 2%

Kappa (wants fixed): 15% − 1% = 14%

So D: Delta pays rf + 2%, Kappa pays 14%.

Exposure: Company A will receive B$20 million.

Spot rate: A$1 = B$2 ⇒ 1 B$ = A$0.5

Current A$ value of the receipt:

20,000,000×0.5=A$10,000,00020{,}000{,}000 \times 0.5 = A\$10{,}000{,}00020,000,000×0.5=A$10,000,000

Daily standard deviation of the exchange rate = 0.5% = 0.005

1-day 95% VaR uses Z ≈ 1.645

VaR:

VaR=Z×σ×exposure=1.645×0.005×10,000,000\text{VaR} = Z \times \sigma \times \text{exposure} = 1.645 \times 0.005 \times 10{,}000{,}000VaR=Z×σ×exposure=1.645×0.005×10,000,000 0.005×10,000,000=50,0000.005 \times 10{,}000{,}000 = 50{,}0000.005×10,000,000=50,000 1.645×50,000=82,2501.645 \times 50{,}000 = 82{,}2501.645×50,000=82,250

So the 1-day 95% VaR is A$82,250 → Option C.

Correct answer: C – Net asset based valuation using replacement cost best suits a capital-intensive company with reliable tangible asset values and highly uncertain future earnings/cash flows.

 B – Shareholders care about real income, so they want dividend growth at least in line with inflation.

 C – Retained earnings must earn a return above inflation to create real value.

 D – Inflation’s effect on future cash flows and required returns must be considered when setting dividend policy.

The mechanics of the DVM calculation are fine:

D1=500,000×1.08=540,000D_1 = 500,000 × 1.08 = 540,000D1​=500,000×1.08=540,000

Required return = 15% + 3% = 18%

Value = D1/(ke−g)=540,000/(0.18−0.08)D_1 / (k_e − g) = 540,000 / (0.18 − 0.08)D1​/(ke​−g)=540,000/(0.18−0.08).

The conceptual problem is assuming dividends can grow at 8% indefinitely when earnings only grow at 6%; over time dividends cannot consistently grow faster than earnings.

B. Using present value of earnings (or free cash flows) is more appropriate when valuing a controlling interest, because the acquirer can change the dividend policy. ✅

C. A 5% historical dividend growth rate may not reflect future growth – assuming it will continue indefinitely is a big weakness. ✅

D. The industry average beta may not reflect Company B’s specific financial (gearing) risk; it should ideally be adjusted to reflect B’s capital structure. ✅

The others:

A is incorrect – you should generally use the target’s cost of equity (or project-specific) not Company A’s.

E is incorrect – unlisted companies can use CAPM via proxy/industry betas.

A company with no projects for 2 years and a WACC of 10% should not lock surplus cash into investments earning less than 10%, as that destroys shareholder value. The best way to maximise shareholder wealth is to return the surplus so shareholders can invest at their own required return.

✅ Answer: D. Paying the surplus cash as a dividend at the earliest opportunity.

Step 1: Dividend per share next year

0.045×1.04=0.04680.045 \times 1.04 = 0.04680.045×1.04=0.0468

Step 2: Total dividend payment

0.0468×100 million=4.68 million0.0468 \times 100\ \text{million} = 4.68\ \text{million}0.0468×100 million=4.68 million

Step 3: Interest expense

Bond nominal = 60m

Coupon = 5%

Interest=60×0.05=3.0 million\text{Interest} = 60 \times 0.05 = 3.0\ \text{million}Interest=60×0.05=3.0 million

(Market value is irrelevant for covenant calculations — CIMA F3 rule)

Step 4: Profit after tax

EBIT=11.25\text{EBIT} = 11.25EBIT=11.25 EBT=11.25−3.0=8.25\text{EBT} = 11.25 - 3.0 = 8.25EBT=11.25−3.0=8.25 \text{Tax (20%)} = 1.65 Profit after tax=6.60 million\text{Profit after tax} = 6.60\ \text{million}Profit after tax=6.60 million

Step 5: Retained earnings

6.60−4.68=1.92 million6.60 - 4.68 = 1.92\ \text{million}6.60−4.68=1.92 million

Step 6: Covenant test

Required minimum retained earnings = $2 million

1.92<2.001.92 < 2.001.92<2.00

❌ Covenant breached

✅ Correct Option:

C. Covenant is breached as retained earnings = $1.92 million\boxed{\textbf{C. Covenant is breached as retained earnings = \$1.92 million}}C. Covenant is breached as retained earnings = $1.92 million​

A spin-off/demerger normally involves separating a division or subsidiary and giving its shares to the existing shareholders. It doesn’t in itself raise finance (A), it doesn’t introduce new shareholders to the core entity (B), and it does not inherently increase takeover risk (D). Its main advantage is that it allows the market to value the demerged business separately, revealing its “true” value – C is correct.

In CIMA F3, equity valuation using P/E multiples is based on earnings available to ordinary shareholders (i.e. profit after interest and tax). The syllabus emphasises that when valuing a potential takeover target, you should (1) derive maintainable post-tax earnings and then (2) apply a P/E multiple that reflects prices actually paid in comparable acquisitions, not just average stock-market multiples.

Calculate maintainable earnings:

Profit before interest and tax (PBIT) = $5m

Less interest on 10% bonds: 10% × $10m = $1m

Profit before tax = $4m

Tax at 20% = $0.8m

Earnings for equity = $3.2m

Select the appropriate P/E multiple:

F3 explains that “takeover P/Es” are usually higher than sector trading P/Es, reflecting the control premium. Here we have:

Overall market P/E = 20

Retail sector P/E = 10

Recent retail takeovers P/E = 13

For a takeover valuation we use the 13× multiple from recent sector takeovers.

Compute equity value:

Equity value=3.2m×13=41.6m\text{Equity value} = 3.2\text{m} \times 13 = 41.6\text{m}Equity value=3.2m×13=41.6m

Debt’s market value (90% of $10m) is not added here because the P/E method already gives the equity value.

So, a reasonable expected equity value in a takeover is $41.6 million.