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

STU’s value is mainly in its people (human capital) and has few tangible assets. Net asset valuation relies on balance sheet assets, but internally generated intangibles like human capital are not recognised under normal accounting rules. So the accounts understate the real value of the business.

Answer: B. STU does not account for its intangible assets.

A. Any opportunity to benefit from future exchange rate movements is lost.

True – a money market hedge locks in the effective exchange rate now, so you remove both downside risk and upside potential.

B. It can be tailored to match the size of the payment.

True – you can structure the borrowing/lending and FX transaction to exactly match the foreign currency amount due.

C. It manages transaction risk.

True – transaction risk (uncertainty in the home currency value of a known future foreign-currency cash flow) is what a money market hedge directly addresses.

D. It offers a significantly better outcome than a forward contract.

False – under interest rate parity, a money market hedge and a forward contract should give similar effective rates (ignoring spreads and costs).

E. It avoids the need to find immediate finance.

False – for a payable, you normally borrow or use cash now as part of the hedge, so it does not avoid immediate financing; it actually requires it.

✅ Answer to Q29: A, B, C

Common data

Existing shares = 6 million

Current share price = $4.00

Funds to raise = $9 million

Director A – 25% discount

Rights issue price:

4.00×(1−0.25)=4.00×0.75=$3.004.00 \times (1 - 0.25) = 4.00 \times 0.75 = \$3.004.00×(1−0.25)=4.00×0.75=$3.00

So C is correct (“The rights issue price will be $3.00 under Director A's proposal.”)

Number of new shares:

9m3.00=3 million shares\frac{9\text{m}}{3.00} = 3\text{ million shares}3.009m​=3 million shares

After issue, total shares = 6m + 3m = 9m. To issue 3m against 6m existing, the terms are:

3 new6 existing=12\frac{3\text{ new}}{6\text{ existing}} = \frac{1}{2}6 existing3 new​=21​

So 1 new share for every 2 existing shares – D is correct.

Director B – 30% discount

Rights issue price:

4.00×(1−0.30)=4.00×0.70=$2.804.00 \times (1 - 0.30) = 4.00 \times 0.70 = \$2.804.00×(1−0.30)=4.00×0.70=$2.80

Number of new shares:

9m2.80≈3.214 million\frac{9\text{m}}{2.80} \approx 3.214\text{ million}2.809m​≈3.214 million

This is more shares than under Director A’s proposal (3.214m > 3m), so B is correct.

Because the total post-issue value is the same ($24m existing + $9m new cash), but Director B issues more shares, the TERP under B will be lower, not higher – so A is false. Total shareholder wealth is the same in theory (ignoring costs and signalling), so E is also false.

Correct statements: B, C, D.

Current values (before project):

Equity = 1,100

Debt = 500

Firm value = 1,600

Project cost = 200; NPV = +10.

After the project:

Financed by rights issue (equity only)

Equity = 1,310 → increase of 210

But shareholders have to inject 200 cash themselves.

Net gain in shareholder wealth = 210 − 200 = 10

Financed by bond issue (all debt)

Equity = 1,150 → increase of 50

No new equity cash is put in by shareholders.

Net gain in shareholder wealth = 50

This equals: project NPV (10) + tax shield on extra debt (0.20 × 200 = 40).

Financed by mix of debt & equity at existing D/E

Equity = 1,260 → increase of 160

New equity raised ≈ 137 (since extra debt is 63, total 200).

Net gain = 160 − 137 = 23 (NPV 10 + extra tax shield ≈ 13).

The company’s objective is maximisation of shareholder wealth, so it should choose the financing that gives the highest net increase, which is the bond issue (all debt) with a gain of $50m to equity holders.

This is exactly what Modigliani & Miller with corporate tax predicts: increasing gearing creates value for shareholders via the interest tax shield.

Answer: B. $50 million if financed by debt

The company invoices exports in customers’ currencies, so between invoicing and cash receipt it faces transaction risk (actual foreign-currency cash flows to convert).

Because it competes internationally, long-term exchange rate movements can affect sales volumes and margins, so it also faces economic risk.

It has no foreign subsidiaries or overseas balance sheets to translate, so translation risk is not relevant.

Q36

Newly established, unincorporated service entity → focuses on growth, service quality and staying liquid; dividends and optimal capital structure are not primary yet.

Answer: B, C, D

Forecast P&L (’000):

Operating profit = 1,300

Interest at 5% on $10m = 500

Profit before tax = 800

Tax (25%) = 200

Profit after tax = 600

Profit after tax ≈ free cash flow (FCF).

Planned uses of next year’s FCF at current rates:

Investment in non-current assets = 400

Dividend = 150

Total = 550, leaving 50 spare from FCF 600.

If interest rises to 6%:

New interest = 10m × 6% = 600

New PBT = 1,300 − 600 = 700

Tax = 25% of 700 = 175

New PAT (FCF) = 700 − 175 = 525

Available for investment after paying the same dividend 150:

525−150=375525 - 150 = 375525−150=375

Original planned investment = 400 → now only 375 possible.

Reduction in planned investment = 400 − 375 = 25.

Answer: A. $25,000

(A) describes a collar, not a pure cap. With a collar you sell a floor and buy a cap; that reduces the premium cost. (B) is wrong because with a collar you don’t benefit from rates falling below the floor. (D) is not necessarily true – options can be traded via markets or other counterparties, not just the company’s bank.

Relevant cash flows for a lease–or–buy decision (discounting at post-tax cost of borrowing) are:

A. Tax relief on tax depreciation allowances – relevant for the buy option.

B. Bank loan payments – not relevant; financing flows are excluded when using the borrowing rate as discount rate.

C. Maintenance payments – here, maintenance is paid by the lessee under the lease, and would also be paid if the asset is bought; since it is the same under both options, it is not a differential cash flow.

D. Lease payments – relevant cash outflows under the lease option.

E. Tax relief on the book depreciation – relevant where tax relief is given on book depreciation (here, under the finance lease).

Therefore, the three relevant cash flows from the list are:

Answer (200259):

A, D, E\boxed{A,\ D,\ E}A, D, E​

Applying an industry P/E ratio to DDD's forecast earnings.

PBIT = $500,000

Existing interest = 5% × 300,000 = $15,000

Profit before tax = 500,000 − 15,000 = $485,000

Tax (30%) = 0.30 × 485,000 = $145,500

Earnings = 485,000 − 145,500 = $339,500

Shares = 250,000 ⇒ EPS = 339,500 / 250,000 ≈ $1.36

Share price = $8 ⇒ P/E ≈ 8 / 1.36 ≈ 5.9

Interest cover = PBIT / Interest = 500,000 / 15,000 ≈ 33.3 times

After the new debt and project:

New PBIT = 500,000 + 24,000 = $524,000

New interest = 15,000 + (3% × 200,000) = 15,000 + 6,000 = $21,000

Profit before tax = 524,000 − 21,000 = $503,000

Tax (30%) = 0.30 × 503,000 = $150,900

Earnings = 503,000 − 150,900 = $352,100

EPS = 352,100 / 250,000 ≈ $1.41

New share price = $8.50

New P/E ≈ 8.50 / 1.41 ≈ 6.0 (higher than before)

New interest cover = 524,000 / 21,000 ≈ 25.0 times (lower than before).

So:

Interest cover falls

P/E ratio rises

Correct option: B.

Short-term rates slightly above long-term rates = mildly inverted yield curve.

A – This difference may reverse: Correct – the term structure can and does change over time.

B – Currency expected to strengthen long-term: Lower long-term rates imply lower expected long-term inflation, which is consistent with expectations of a stronger currency in the long run.

D – Interest rates are expected to fall: An inverted yield curve usually reflects market expectations that future short-term rates will be lower than today.

C is wrong because rates are not definite to fall, only expected to.

E is wrong: with short-term rates currently higher than long-term, a long-term borrower would not clearly “save” by borrowing short and refinancing; it also adds refinancing risk.

Current:

DPS just paid D0=0.25D_0 = 0.25D0​=0.25, growth g = 2%, ke=10.5%k_e = 10.5\%ke​=10.5%

D1=0.25×1.02=0.255,P0=0.2550.105−0.02=0.2550.085=3.00D_1 = 0.25 × 1.02 = 0.255,\quad P_0 = \frac{0.255}{0.105 - 0.02} = \frac{0.255}{0.085} = 3.00D1​=0.25×1.02=0.255,P0​=0.105−0.020.255​=0.0850.255​=3.00

After investment: growth g = 4%, ke=12%k_e = 12\%ke​=12%

D1′=0.25×1.04=0.26,P1=0.260.12−0.04=0.260.08=3.25D_1' = 0.25 × 1.04 = 0.26,\quad P_1 = \frac{0.26}{0.12 - 0.04} = \frac{0.26}{0.08} = 3.25D1′​=0.25×1.04=0.26,P1​=0.12−0.040.26​=0.080.26​=3.25

Percentage change:

3.25−3.003.00=0.253=8.33%\frac{3.25 - 3.00}{3.00} = \frac{0.25}{3} = 8.33\%3.003.25−3.00​=30.25​=8.33%

Answer: A. Increase = 8.3%

Z can borrow:

Floating: L + 1

Fixed: 10%

Compare with each:

A: L + 1.5 (worse floating), 9.5 (better fixed) → symmetric, no clear comparative advantage.

D: L + 1.5 (worse), 10.5 (also worse) → Z better in both, no deal.

C: L + 1.5 (worse floating), 9% (much better fixed) → C has advantage in fixed, Z has in floating → good swap partner.

E: L + 1.5 (worse), 12 (much worse) → Z better in both.

Answer: C. Company C

 C – More cash = able to react quickly to unexpected investment opportunities.

 D – Cash buffer reduces the likelihood of liquidity problems in a downturn.

 E – If excess cash were returned, markets might read it as “no good growth opportunities”, so retaining avoids that negative signal.