CIMA Updated F3 Exam Questions and Answers by karson

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.

A poison pill is designed to deter hostile bidders by making a takeover much more costly. When triggered, it usually issues new shares or converts rights at favorable terms to existing shareholders (other than the bidder), diluting the bidder’s stake.

Here, rights to buy future preference shares convert into full ordinary shares, increasing the number of shares in issue and making it more expensive for BCD to gain control. That directly reduces the attractiveness and feasibility of the hostile bid.

Company HGG is young, unlisted, loss-making so far, and has uncertain growth.

Weaknesses of using the dividend growth model here:

A. Future growth rate in earnings/dividends is hard to estimate – very true for an early-stage, high-uncertainty business.

C. It has been unprofitable and has no established dividend pattern, so the basic inputs to the model (D₀ and g) are unreliable.

E. Cost of capital is difficult to estimate for an unlisted company (no directly observable beta or market data).

B is just a description of the model, not a specific weakness here, and D is incorrect because the dividend growth model does discount future dividends (it fully incorporates time value of money).

✅ Answer Q121: A, C, E

A scrip dividend (stock dividend) means shareholders receive additional shares instead of cash. CIMA F3 explains that this is commonly used when a company wants to maintain a “visible” dividend policy but conserve cash because of short-term liquidity or profit pressures. Shareholders get something of value – more shares – while the company avoids a large immediate cash outflow, keeping funds available to support operations and future growth.

In the scenario, the company has strong long-term prospects but current profit and cash-flow problems. That is exactly the situation where F3 suggests that a scrip dividend is attractive: it encourages shareholders to leave cash in the business while still signalling confidence.

A is incorrect: a scrip dividend does not raise new external finance; it just capitalises reserves. B is wrong because issuing more shares normally reduces earnings per share, all else equal. D is misleading: dividend per share usually falls or at best is unchanged in cash terms; what increases is the number of shares, not the cash amount per share. Therefore, C is the most appropriate reason.