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

Competition authorities focus primarily on market structure and competition, not on whether the bid is generous or on employment promises. Their concern is: Will this merger substantially lessen competition?

In food retailing, a key issue is local market concentration – for example, a single group owning too many supermarkets in particular towns or regions. A classic remedy is for the bidder to divest overlapping outlets so that effective competition remains.

B. Agreeing to dispose of specified outlets which overlap geographically directly addresses the competition authority’s main concern and is the standard structural remedy used in practice.

A (more cash) is irrelevant to competition issues.

C (job guarantees) is mainly a political/employment concern, not an antitrust one.

D (promise to pass on cost savings) is difficult to monitor and enforce and is normally viewed as less credible than structural remedies.

So the action most likely to persuade the competition authorities is B.

In CIMA F3, Modigliani and Miller’s (MM) Dividend Irrelevance Theory is a core examinable concept under financial policy decisions. MM argue that dividend policy does not affect shareholder wealth, provided certain highly restrictive assumptions hold true. Under this theory, shareholders are indifferent between dividends and capital gains because they can create their own “homemade dividends” by selling shares if required.

To support this proposition, the following assumptions must apply:

A. There are no transaction costs involved in the issue of new shares (including rights issues)

✔ Correct

CIMA F3 states that MM assume no flotation or transaction costs. If issuing new equity were costly, companies paying high dividends would incur extra costs when raising funds, which would affect shareholder wealth and invalidate dividend irrelevance.

C. Investors act in a rational manner

✔ Correct

The theory assumes investors are rational and base decisions solely on wealth maximisation, not preferences for income versus capital gains. This assumption is explicitly stated in CIMA learning materials.

D. The capital markets are efficient markets

✔ Correct

An efficient market ensures that share prices reflect all available information. CIMA F3 emphasises that efficiency is essential so that financing and dividend decisions do not distort share prices.

Why the other options are incorrect

B. There is a multiplicity of corporate and personal income tax rates

✘ Incorrect

MM’s original theory assumes no taxation, not multiple tax rates. Taxes would make dividends and capital gains unequal.

E. Investors do not always have access to perfect information

✘ Incorrect

MM assume perfect information. Any information asymmetry would affect pricing and invalidate dividend irrelevance.

Discursive_F0

IFRS 7 requires detailed disclosures about financial instruments and risk management, including currency risk, sensitivity analysis, and how those risks are managed. When these are published for the first time, investors may learn new information about:

The extent of US$ exposure (40% export sales), and

The quality of risk management (hedging, matching, etc.).

Efficient market theory (covered in F3) says prices adjust to new, relevant information. That new information could make investors more confident (if risks are well managed) or more concerned (if risks are high and poorly managed). So the share price could either increase or decrease, depending on the market’s reaction.

That matches option D.

Options A and C assume a one-way direction (always up or always down), which is unrealistic. B is wrong because segmental analysis does not normally give the same detailed, risk-focused disclosure as IFRS 7.

Current profit after tax (PAT) = $750,000.

After sale, extra directors’ salaries (pre-tax) = $50,000.

Tax rate = 20% → tax saving on extra salaries = 50,000 × 20% = 10,000.

So reduction in PAT = 50,000 − 10,000 = $40,000.

Maintainable PAT = 750,000 − 40,000 = $710,000.

Using P/E of 7:

Value = 710,000 × 7 = $4,970,000.

✅ Answer: D. $4,970,000

Pre-acquisition standalone values:

ABB = $55m

BBA = $25m

Total pre-deal value = $80m.

After the acquisition, ABB (the combined business) is expected to generate post-tax cash flows of $10m per year in perpetuity. Cost of equity = 10%, and the firm is all-equity financed, so:

Post-acquisition value=100.10=$100m\text{Post-acquisition value} = \frac{10}{0.10} = \$100\text{m}Post-acquisition value=0.1010​=$100m

Synergy value = value of combined firm − sum of standalone values:

Synergy=100−80=$20m\text{Synergy} = 100 - 80 = \$20\text{m}Synergy=100−80=$20m

So the best estimate of the synergy from the acquisition is $20 million.

In CIMA F3, capital structure choice affects tax, risk and shareholder expectations. Debt interest is tax-deductible whereas dividends are not, so using more debt reduces taxable profit. Therefore statement A (“no impact on tax”) is false. Retained earnings are not “free”: shareholders could have taken that cash and invested elsewhere, so the cost of retained earnings equals the cost of equity – B is false.

As gearing rises, equity becomes riskier because fixed interest must be paid before any earnings go to shareholders. Under Modigliani–Miller with or without tax, this raises the cost of equity, so D is true. Replacing debt with equity reduces the probability of default and so reduces overall financial risk, making E true.

Issuing more equity increases the number of shares; investors will expect dividends on those shares in future, so total dividend outflows are likely to rise even if DPS stays the same. This added distribution pressure makes F true. C (“debt is always preferable”) is rejected in F3 because of higher financial risk and potential increase in WACC beyond an optimal gearing level.

A and B similar market cap.

A’s gearing (D / (D+E)) = 30% vs industry 50% → relatively under-geared.

Rumours of bid good for A (A share price up) and bad for B (B share price down).

Financing choices: share exchange or cash raised by new debt.

Assess statements:

A. A’s price ↑ and B’s price ↓. For a given value per B share, fewer A shares are now needed than a few weeks ago → True.

B. With a share exchange, B’s shareholders receive A’s shares, so they share in future performance of combined entity → True.

C. Financing method does affect EPS (interest expense vs number of shares) → False.

D. Under MM with tax and given A is under-geared vs the 50% industry norm, adding debt is likely to lower WACC via the tax shield (ignoring distress costs) → Most likely true.

E. A share exchange issues equity, not debt; gearing effect is ambiguous and not necessarily an increase → Not “most likely”.

Answer: A, B and D.

Explanation (concise):

To value the equity of BNM appropriately, HJK can use:

D. Share price × number of shares in issue

This is simply the market capitalisation, i.e. the current market value of equity.

A. Cash flows of $24 million discounted at the cost of equity

Discounting cash flows available to equity holders (free cash flow to equity) at the cost of equity is a standard equity valuation approach under CIMA F3.

E. Cash flows of $30 million (= $40 million net of tax at 25%) discounted at WACC minus the value of debt

Here, $30m is effectively FCFF = EBIT × (1 – T). Discounting FCFF at WACC gives the value of the firm; subtracting the value of debt then gives the equity value.

Option B double counts retained profits (already reflected in the share price), and option C is based on the wrong cash flow definition for equity valuation.

Verified Answer: = B

CIMA F3 compares different forms of long-term finance, including preference shares and bonds/Eurobonds, focusing on control, tax treatment, gearing impact, and flexibility.

Statement B captures a key advantage of preference shares from the company’s perspective: if profits are poor, preference dividends can be omitted or deferred, especially when they are cumulative. Although unpaid dividends accumulate, non-payment does not normally constitute default in the same way as missing an interest payment on a bond. For a Eurobond, failure to pay interest when due would place the company in default, triggering legal and reputational consequences. This extra flexibility is exactly why preference shares might be favoured over bonds.

Statement A is misleading: Eurobonds are often unsecured, and security (or lack of it) is not a defining difference versus preference shares.

Statement C is incorrect in this context: redeemable cumulative preference shares are typically treated as a financial liability under IFRS (like debt), so they would generally increase gearing, not reduce it.

Statement D is clearly wrong as dividends are not tax-deductible, whereas bond interest normally is. Therefore, the best justification for issuing preference shares rather than a Eurobond is B.

A – Retained earnings: When you value equity by discounting cash flows to equity, the result already represents the total value of equity. You don’t then add book retained earnings on top – that would double-count equity.

B – Deducting $400m for the bond: With a FCFE valuation you do not deduct the value of debt at all – the cash flows are already after interest and principal. So deducting the bond is wrong, and in any case they used nominal value ($400m) instead of market value ($380m).

C – Using WACC: Cash flows to equity must be discounted at the cost of equity, not at WACC. WACC is used only when discounting free cash flow to the firm.

Using cash flows to equity (D) is fine, and deducting replacement capex (E) is correct because only free cash after maintaining assets belongs to shareholders.

A residual dividend policy pays dividends only after all positive-NPV projects are funded – typical for firms whose investors want growth rather than income.

C is a small listed company whose investors seek maximum capital growth → classic residual policy case.

Answer: C. Entity C

“Boot-strapping” in takeover valuation is the shortcut where you:

Add the current post-tax earnings of bidder and target;

Apply the bidder’s (usually higher) P/E ratio to that combined earnings figure to estimate the post-acquisition value.

Under IAS 39, a derivative such as a forward contract must always be measured at fair value in the statement of financial position. When that derivative is designated as a cash flow hedge of a highly probable forecast transaction and hedge accounting criteria are met, the effective portion of the gain or loss on the hedging instrument is recognised in Other Comprehensive Income (OCI), not in profit or loss.

Here, by 31 December 20X3 the forward contract (entered at nil cost) has a positive fair value of $10,000, so there is a gain of $10,000. Because the hedge has been correctly designated as a cash flow hedge, that gain is treated as part of the cash flow hedge reserve in equity via OCI. It will be recycled to profit or loss in a later period when the hedged transaction affects profit or loss (e.g. when the forecast foreign currency transaction occurs).

So for the year ended 31 December 20X3, the correct treatment is to recognise a $10,000 gain in OCI – answer D.

Current year:

Revenue = $50m

PBIT = $10m → margin = 10/50 = 20%

Tax = 20%

Earnings = 10 × (1 − 0.20) = $8m

Next year:

Revenue still $50m

40% of revenue = $20m → margin falls to 18%

PBIT on this part=20×18%=3.6\text{PBIT on this part} = 20 \times 18\% = 3.6PBIT on this part=20×18%=3.6

60% of revenue = $30m → margin stays 20%

PBIT on this part=30×20%=6.0\text{PBIT on this part} = 30 \times 20\% = 6.0PBIT on this part=30×20%=6.0

Total PBIT next year:

3.6+6.0=9.6 million3.6 + 6.0 = 9.6\ \text{million}3.6+6.0=9.6 million

Earnings after tax next year:

9.6×(1−0.20)=9.6×0.8=7.68 million9.6 \times (1 - 0.20) = 9.6 \times 0.8 = 7.68\ \text{million}9.6×(1−0.20)=9.6×0.8=7.68 million

Percentage reduction in earnings:

8.00−7.688.00=0.328=0.04=4%\frac{8.00 - 7.68}{8.00} = \frac{0.32}{8} = 0.04 = 4\%8.008.00−7.68​=80.32​=0.04=4%

Correct option:

C. Reduction of 4.0%\boxed{\text{C. Reduction of 4.0\%}}C. Reduction of 4.0%​

Advantages of issuing 20-year bonds vs a 20-year bank loan:

A. Larger capital market – bond markets tap many investors.

B. Greater availability of long-term funds – banks often prefer shorter maturities.

E. Lower interest rate – disintermediation can give cheaper funding for a strong credit.

C and D are usually disadvantages of bonds (higher arrangement cost and more admin).

1. Sell from domestic market

Revenue = A$100,000

Costs (given) = A$45,000

Import duty = 10% of 100,000 = A$10,000 (tax-deductible)

Profit before tax = 100,000 − 45,000 − 10,000 = A$45,000

Tax at 25% = 0.25 × 45,000 = A$11,250

Profit after tax = 45,000 − 11,250 = A$33,750

2. Sell via foreign subsidiary

Revenue = B$104,500

Costs = B$49,500

Profit before tax = 104,500 − 49,500 = B$55,000

Tax at 30% = 0.30 × 55,000 = B$16,500

Profit after tax = 55,000 − 16,500 = B$38,500

Convert to A$ at A$1 = B$1.10:

A$ profit = 38,500 / 1.10 = A$35,000

Foreign subsidiary gives the higher after-tax profit.

Answer: C. Foreign subsidiary: A$35,000

Company A’s equity value at the launch date (end of 20X1) is the PV of a growing perpetuity of FCFE:

First FCFE (end of first year of operation, 20X2): $2m

Growth: 8%

Cost of equity: 12%

Value of Company A at end-20X1:

V=20.12−0.08=20.04=50 millionV = \frac{2}{0.12 - 0.08} = \frac{2}{0.04} = 50 \text{ million}V=0.12−0.082​=0.042​=50 million

Company V owns 40%:

Value of stake at sale=0.4×50=20 million\text{Value of stake at sale} = 0.4 \times 50 = 20 \text{ million}Value of stake at sale=0.4×50=20 million

It invests $15m at 1 Jan 20X0 and gets $20m at end-20X1 (≈ 2 years):

15(1+r)2=20⇒(1+r)2=2015=4315(1 + r)^2 = 20 \Rightarrow (1 + r)^2 = \frac{20}{15} = \frac{4}{3}15(1+r)2=20⇒(1+r)2=1520​=34​ 1+r=43≈1.1547⇒r≈15.47%1 + r = \sqrt{\frac{4}{3}} \approx 1.1547 \Rightarrow r \approx 15.47\%1+r=34​​≈1.1547⇒r≈15.47%

Nearest whole % = 16%

Answer: C. 16%