F3 Exam Dumps - Financial Strategy

CIMA F3 emphasises that shareholders expect directors to focus on value creation after an acquisition, particularly in the areas that protect and enhance the cash flows and synergies that justified the deal. Following an all-cash acquisition, the target’s former shareholders have exited, so the acquirer’s shareholders will not prioritise tailoring dividends to meet the target shareholders’ preferences (B is not relevant). Also, the question states the acquisition has just been completed, so regulatory approval needed to complete the acquisition (C) is no longer a priority stage item. What matters immediately is executing post-deal integration to secure the expected benefits. First, directors must ensure integration and retention of key employees from the acquired firm (A), especially in service/knowledge businesses where people drive client relationships and operational capability. Second, they must protect revenues by retaining the acquired firm’s key customers (D); losing customers can destroy acquisition value quickly. Third, they must deliver the deal logic by realising anticipated post-acquisition synergies (E), such as cost savings, higher capacity utilisation, cross-selling, and process improvements. These priorities align with F3’s post-merger integration focus: preserve the earnings base, then convert strategic fit into measurable synergy cash flows.

Negatives for the bank:

A. Advanced, custom-made tech equipment – poor resale value and high obsolescence risk, weak security.

C. Premises on a long-term lease and not fully fitted out – limited asset security; further capital outlay still needed.

E. Essential ongoing R&D – continuing cash demands and uncertainty of returns.

Positives, so not negatives:

B. Continuing profitability and net cash generation – good for servicing debt.

D. Founders’ personal investment – shows commitment and loss-sharing; strengthens equity base.

 Value of V currently = 300m × $5 = $1,500m

 Offer price = $5 × 1.10 = $5.50 → cost = 300m × 5.50 = $1,650m

ï‚· Synergy = $100m

 Net gain to T’s shareholders = 100 − 150 = –$50m → a loss of $50m, so they’d reject.

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

Current PBIT = $25m

Existing debt = $60m at 5% → interest = 0.05 × 60 = $3m

Current interest cover = 25 / 3 = 8.3 times (as stated).

New borrowing: $20m at 10% → extra interest = 0.10 × 20 = $2m

Total interest after borrowing = 3 + 2 = $5m

PBIT in first year is unchanged at $25m, so:

New interest cover=255=5 times\text{New interest cover} = \frac{25}{5} = 5 \text{ times}New interest cover=525​=5 times

Loan covenant requires minimum cover of 4 times. New cover (5x) is above this, so covenant is not breached.

Correct answer: D – Interest cover would reduce to 5 times and the covenant would NOT be breached.

Market cap isn’t available yet, book-value net asset valuation ignores the substantial unrecognised oil reserves, and current earnings don’t reflect the value of those reserves. DCF based on forecast cash flows from the proven reserves is the most appropriate for an IPO price here.

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.

The swap would be shown at fair value in the statement of financial position and the change in value posted to other comprehensive income.