F3 Exam Dumps - Financial Strategy

In CIMA F3, rights issues and post-issue valuation are taught under the learning outcomes relating to financing decisions, equity issuance, and shareholder value analysis. The Theoretical Ex-Rights Price (TERP) represents the price a share should trade at immediately after the rights issue when the “value dilution” and “value added” of the project are taken into account.

According to the financial strategy principles taught in F3, the TERP is calculated by adding:

The current market value of equity,

The cash raised from the rights issue, and

The net present value (NPV) of the investment project,

then dividing by the total number of shares after the issue. This reflects the CIMA F3 view that share prices should adjust to reflect both new financing inflows and future economic benefits associated with positive-NPV projects.

Step-by-step application of the F3 method

(1) Current shareholders’ equity value:

(2) Rights issue price:

Rights issued at a 10% discount:

(3) Number of new shares issued:

(4) Total shares after issue:

(5) Total value after issue and project:

Add value of cash raised and NPV:

(6) TERP formula:

Rounded to two decimal places:

This calculation follows the CIMA F3 principle that positive-NPV projects increase shareholder wealth, and therefore must be added to the total post-issue company valuation before dividing by the enlarged share capital.

Free cash flow year 3 = Z$240m

Spot rate now: Z$1 = X$2

Inflation: X 2%, Z 4% → expected depreciation of Z$ via PPP:

Factor k=1.021.04=51/52k = \frac{1.02}{1.04} = 51/52k=1.041.02​=51/52

Year-3 expected rate:

S3=2×k3≈2×0.9434=1.8868 X/ZS_3 = 2 \times k^3 \approx 2 \times 0.9434 = 1.8868 \ \text{X$/Z$}S3​=2×k3≈2×0.9434=1.8868 X/Z

FCF in X$:

240×1.8868≈X$452.8m240 \times 1.8868 \approx X\$452.8\text{m}240×1.8868≈X$452.8m

Discount at 8% using given factor 0.794:

452.8×0.794≈X$359.5m452.8 \times 0.794 \approx X\$359.5\text{m}452.8×0.794≈X$359.5m

Nearest million: X$360m

Answer: D – X$360 million

Current situation:

Earnings = $2m

P/E = 10 → Market value = 2 × 10 = $20m

After expansion:

Earnings increase by 25% → new earnings = 2 × 1.25 = $2.5m

New P/E = 8 → New market value = 2.5 × 8 = $20m

Shareholder wealth (equity value) stays at $20m, so the **most likely change is:

D. No change in shareholder wealth.**

A. “A bond issuer must appoint at least one market-maker…” – TRUE (in exam context)

On public bond markets, an issuer typically works with one or more banks/dealers as market-makers. Their role is to quote buy and sell prices and help ensure liquidity so investors can trade in and out. From an exam perspective, this is treated as a standard feature of traded corporate/government bonds.

B. “The redemption yield… can be determined by calculating the internal rate of return…” – TRUE

The redemption yield (yield to maturity) is exactly the IRR of the bond’s cash flows (all coupon payments plus redemption amount) based on the current market price. That’s standard CIMA F3 territory.

C. “Investors in traded bonds have an ownership stake…” – FALSE

Bondholders are creditors, not owners. They have a contractual right to interest and principal, but no equity participation, voting rights, or residual claim (except in liquidation after other priorities).

D. “A first-time bond issuer will find it easier to issue bonds than arrange a conventional term loan.” – FALSE

It’s usually the opposite. For a new issuer, arranging a bank term loan is typically quicker and simpler than accessing the bond market, which involves credit ratings, documentation, listing and investor marketing.

E. “Governments are the most frequent issuers of bonds…” – TRUE

Governments regularly issue sovereign bonds (treasuries, gilts, etc.) both to finance spending and to roll over existing national debt. This is exactly how public deficits are funded in practice and is a standard statement in financial strategy texts.

Hence: A, B and E.

Dividends are set to suit family cash needs, so DDM (A) won’t reflect value well.

NAV (B) ignores earnings power and intangibles for a going concern.

There are listed comparables with similar capital structures, so applying an industry P/E to this firm’s earnings is standard practice for small private companies.

DCF at WACC (D) is theoretically strong but requires detailed, reliable forecasts; earnings are highly sensitive to the economy, so forecasts would be very uncertain.

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%

In CIMA F3, the Calculated Intangible Value (CIV) method is used to estimate intangible value by comparing a business’s profits to what would be expected from its tangible asset base, typically relying on normalised, sustainable earnings and an assumption of continuing returns. This scenario has three features that reduce CIV validity. First, the business owns freehold property whereas the industry norm is to lease (A). CIV depends on a “normal” tangible asset base and the return on those tangibles; a non-standard capital structure in tangibles can distort the benchmark return and the computed “excess earnings,” so adjustments would be required. Second, significant profits are forecast only for three years with negligible profits thereafter (B). CIV implicitly assumes excess earnings are sustainable (often capitalised as a continuing benefit), so a short-lived profit window undermines the idea of capitalising excess returns into a continuing intangible value. Third, the business has not yet made a profit (C), which weakens CIV because it typically uses observed/established earnings to compute excess returns; early-stage forecasts add significant estimation risk. CIV can be applied to unlisted companies (so D is not a limitation), and the fact that software IP is not in the accounts is exactly why an intangible valuation approach is considered (so E is not a limitation).

A – Access to technical expertise: Q’s staff are leading experts and human capital is very valuable; acquiring this is a clear benefit.

D – Gain economies of scale: Both firms operate in the same technical service industry, so combining operations can reduce average costs and share overheads.

E – Improve EPS: Q has shown consistent earnings growth; if acquired at a reasonable price, this growth can enhance M’s earnings and potentially its EPS.

Diversification benefits (B) are limited because they are in the same industry, and intangible assets such as human capital are not strong collateral for borrowing (C).