CIMA Updated F3 Exam Questions and Answers by giovanni

Before announcement:

Equity = 4m shares × $4.0 = $16m

Debt = $7m

Gearing = 7 / 16 = 43.75% → already above 40%.

After additional $2m debt and higher share price:

Debt = 7 + 2 = $9m

Equity = 4m × $4.2 = $16.8m

Gearing = 9 / 16.8 ≈ 53.6% → even further above the 40% ceiling.

So the gearing objective is exceeded both before and after, and gearing rises.

R is a retailer; S is its supplier (manufacturer). The classic vertical-integration synergy is lower purchase costs and better value-chain control.

Answer: A. Savings due to a reduction in purchase costs and more control over the valu

 Interest cover = PBIT / Interest = 20 / 5 = 4 times ≥ 3 ⇒ covenant met.

 Next year dividend per share = 0.04 × 1.10 = 0.044.

Total dividend = 0.044 × 200m = 8.8m.

Retained earnings = Earnings – Dividends = 12 – 8.8 = 3.2m < 3.5m ⇒ retained-earnings covenant breached only.

Comprehensive and Detailed Step by Step Explanation with all CIMA F3: Financial Strategy documents: =

When valuing a business by discounting free cash flows to the firm (FCFF), CIMA F3 explains that the correct discount rate is the weighted average cost of capital (WACC) of that specific business, not the parent’s WACC. FCFF are cash flows available to both debt and equity providers, so they must be discounted using a rate that blends the required returns of debt and equity in proportion to the company’s own capital structure.

The subsidiary operates in training, a different line of business from the publishing parent, so its business risk is better represented by the asset beta of a comparable listed training company. F3 teaches that you should use a sector asset beta to capture operating risk, then apply the gearing (debt-to-equity mix) of the business being valued to derive an appropriate WACC. Because the intention is to dispose of the subsidiary as a stand-alone entity, the relevant gearing is that of the subsidiary, not the publishing group.

Option C is therefore correct: it uses a WACC (appropriate for FCFF), based on the subsidiary’s capital structure (financial risk) and the training-sector asset beta (business risk). Options A and D wrongly use the parent’s gearing, and B uses only a cost of equity rather than WACC, so they are inconsistent with F3 valuation principles.