F3 Exam Dumps - Financial Strategy

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

B. Tax relief on lease payments have not been lagged correctly – ERROR

Tax is paid one year after the year to which it relates. Lease rentals in each project year (1–4) give tax relief in years 2–5. In the appraisal, the tax relief on lease payments is shown too early (years 1–4), so the lag is wrong.

C. Using the 10% discount rate is incorrect – ERROR

A lease-versus-buy comparison should discount finance cash flows at the after-tax cost of borrowing, not the nominal interest rate. Here, the after-tax cost of debt is:

10%×(1−0.20)=8%10\% \times (1 - 0.20) = 8\%10%×(1−0.20)=8%

So using 10% is an error.

F. The salvage value has been included within the lease option – ERROR

Under an operating lease the asset is not owned by the lessee, so it does not receive the $100,000 residual value. Including a salvage value in the leasing case is therefore incorrect.

Options D and E are not errors (operating cash flows and specific loan repayments are rightly excluded), and the timing of the lease payments themselves (A) is correct.

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.

Short-term interest rate futures (STIRs) are:

Standardised, exchange-traded contracts

Not tailored exactly to one company’s needs (that’s FRAs)

Traded on an exchange, so you can close out early by taking an opposite position

If interest rates fall, futures prices rise (since price ≈ 100 – interest rate)

Now check each statement:

A. “Tailored to exact needs” → False (that’s an FRA)

B. “If interest rates go down the price will have fallen” → False (it rises)

C. “Must be kept for whole duration” → False

D. “Date is flexible and the position can be closed quickly and easily” → True (you choose the contract month and can close out any time before expiry)

Answer: D. The date is flexible and the position can be closed quickly and easily.

When valuing an unlisted company using a P/E ratio from a similar listed company, we normally reduce the proxy P/E to reflect the extra risk and reduced attractiveness of the unlisted investment.

A. Relative lack of marketability – Unlisted shares are harder to sell and usually take longer to realise, so investors demand a higher return, i.e. a lower P/E. ✔

B. Lower level of scrutiny and regulation – Unlisted companies face less disclosure and governance requirements, so information risk is higher. Greater risk ⇒ lower valuation multiple ⇒ reduced P/E. ✔

C. Smaller and less established – Unlisted companies tend to be smaller, less diversified and less stable, so investors again expect a higher return, implying a lower P/E. ✔

D. Control premium not included – If the proxy P/E excludes a control premium but you are valuing a controlling stake, you would increase the P/E, not reduce it. ✘

E. Higher forecast earnings growth – Higher expected growth justifies a higher P/E, not a lower one. ✘

F. One-off profit item in latest earnings – This should be dealt with by adjusting the earnings, not by cutting the P/E multiple. ✘

So the three factors justifying a reduction in the proxy P/E are A, B and C.

The directors are using free cash flows to all investors but they want to value equity only. For equity valuation they should discount equity cash flows (dividends or FCFE) at the cost of equity (10%), so using WACC is a weakness → A.

The cash flow in Year 3 is stated as “Year 3 and each year thereafter = 7”. That means a level cash flow from Year 3 onwards, i.e. a perpetuity, but they have only discounted one year of it (7 × 0.794). They should have used a perpetuity factor → C.

Discounting free cash flow to all investors at WACC gives the value of the whole entity (firm value), not the equity. To get equity value you would then subtract the market value of debt. They have not done this → D.

B and E are therefore not appropriate criticisms.

Current A$ revenue: Country A = 75m; Country B = 25m → total = 100m; B share = 25%.

At A$1 = B$2, B-revenue in B$ = 25m / 0.5 = 50m B$.

B$ depreciates 10% vs A$: approx new rate 1B$ ≈ 0.4545 A$.

New A$ revenue from B = 50m × 0.4545 ≈ 22.7m A$.

New total revenue ≈ 75 + 22.7 = 97.7m A$.

New percentage from B = 22.7 / 97.7 ≈ 23.3%.

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.