F3 Exam Dumps - Financial Strategy

Approach A

Issue 10-year bond at 6% → net interest cost = 6.0%

Approach B

Borrow from bank at Libor + 2.5%

Enter 10-year swap. Market quote 4.0–4.2% vs Libor.

For a borrower wanting to pay fixed, it will pay the higher fixed rate (4.2%) and receive Libor.

Net cost under B:

Pay bank: Libor + 2.5%

Pay swap fixed: 4.2%

Receive from swap: Libor

Overall:

(Libor+2.5%)+4.2%−Libor=6.7%(\text{Libor} + 2.5\%) + 4.2\% - \text{Libor} = 6.7\%(Libor+2.5%)+4.2%−Libor=6.7%

So B costs 6.7% p.a. vs A at 6.0% p.a.

Difference = 0.7% per year, with Approach A cheaper.

Answer: A – Approach A is 0.7% a year less expensive.

In CIMA F3, the evaluation of mergers and acquisitions focuses on whether shareholder wealth is increased through strategic and operational synergies, rather than accounting or cosmetic effects. When assessing benefits, CIMA emphasises real economic advantages arising from the acquisition.

A. Access to technical expertise ✔ Correct

This is the most significant benefit in this scenario. Company Q operates in a highly technical service industry and derives much of its value from human capital. CIMA F3 explicitly recognises that acquiring skilled employees and specialist knowledge constitutes a knowledge-based synergy, which can enhance innovation, service quality, and competitive advantage for the acquirer.

D. Gain economies of scale ✔ Correct

Both companies operate in the same industry, making economies of scale highly achievable. CIMA F3 identifies cost synergies—such as shared infrastructure, reduced overheads, and improved purchasing power—as a primary motive for horizontal acquisitions. These efficiencies directly enhance shareholder value.

E. Improve earnings per share (EPS) ✔ Correct

Although CIMA warns that EPS growth alone does not guarantee value creation, it remains a likely outcome where genuine synergies and earnings growth exist. Given Company Q’s consistent earnings growth and Company M’s ability to apply its listed-company resources, EPS enhancement is a plausible benefit to shareholders.

Why the other options are incorrect

B. Reduction of risk through diversification ✘ Incorrect

CIMA F3 states that diversification benefits arise mainly from unrelated acquisitions. As both firms operate in the same industry, shareholders gain little additional risk reduction.

C. Improved asset backing due to intangible assets ✘ Incorrect

Intangible assets—especially human capital—are generally not acceptable collateral for borrowing. CIMA F3 highlights that asset backing depends primarily on tangible, transferable assets.

✅ Final Answer:

A, D, E\boxed{A,\ D,\ E}A, D, E​

You can send the next CIMA F3 question whenever you’re ready.

The market yield of 8% is a before-tax return to investors. For the company, interest payments reduce taxable profit, so the after-tax cost of debt is:

Cost of debt=Yield×(1−tax rate)\text{Cost of debt} = \text{Yield} \times (1 - \text{tax rate})Cost of debt=Yield×(1−tax rate)

This makes the company’s cost of debt lower than the 8% market yield.

Interest rate parity (IRP) says the forward exchange rate adjusts so that investors earn the same return in different currencies once hedged, otherwise arbitrage profits would exist. If parity doesn’t hold, traders can lock in risk-free gains, and their trades push rates back to parity.

So the model works well because:

Answer: C – Any divergence from parity can be observed by the market and corrected by arbitrage.

The question asks for advantages to the acquiring company (ADC/ABC) of using shares rather than cash to pay for DEF.

C. It incentivises DEF to continue creating value for the combined group

If DEF’s shareholders (and possibly managers) receive shares in ADC, they now own part of the combined business. That aligns their interests with ADC’s existing shareholders and encourages them to help grow the value of the group.

E. The risk of poor future performance of the acquisition is shared with the DEF company shareholder.

If ADC pays with shares, DEF’s shareholders share in both the upside and downside. If the acquisition underperforms, the fall in value is shared instead of all the risk resting on ADC’s original shareholders. That’s an advantage for ADC.

F. It preserves liquidity

Paying with shares means ADC does not need to use up cash or raise new debt. This preserves cash balances and borrowing capacity, which is a clear advantage.

Why not the others?

A (sharing benefits of future growth with DEF shareholders) is actually a cost from ADC’s existing shareholders’ viewpoint – they give away more of the upside.

B dilution of ownership is also a disadvantage, not an advantage.

D a tax saving for ABC – the tax impact is usually more relevant for sellers or when using debt, not typically a direct advantage of share consideration to the acquirer.

Consider each statement:

A. Foreign tax rate 40% – higher than home 20% → disadvantage.

B. Double tax treaty – avoids double taxation on profits remitted → advantage.

C. 100% Year-1 tax depreciation in foreign country – big early tax shield → advantage.

D. High customs duties on imports into foreign country – makes exporting costly; local production via subsidiary avoids duties → advantage.

E. Restrictions on remitting profits – makes getting cash out difficult → disadvantage.

Answer: B, C, and D

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.