CIMA Updated F3 Exam Questions and Answers by iqra

Company currently pays fixed 10% but wants variable.

Swap quotes: 3.1% (bid), 3.5% (ask).

To convert to variable, it receives fixed and pays LIBOR. So it receives the bid rate 3.1%.

Net outflow:

Pay 10% on loan

Receive 3.1% fixed from swap

Pay LIBOR on swap

Net cost = LIBOR + (10% − 3.1%) = LIBOR + 6.9%.

Answer: C. Risk-free rate + 6.9%

Under traditional (pre–Modigliani & Miller) capital structure theory, there is an assumed inverse relationship between WACC and company value. The idea is:

As a firm moves towards its optimal capital structure, the WACC falls, and the total value of the firm (equity + debt) rises.

Beyond that optimal point, extra gearing increases financial risk, so the required return from both debt and equity goes up, causing WACC to rise and firm value to fall.

So, within this framework, if a company’s WACC increases, that means it has moved away from its optimal capital structure, and the value of the company will decrease.

Therefore, under traditional theory, an increase in WACC → decrease in company value, so the correct answer is B.

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.

EBIT = 5

Interest @5% on 10m = 0.5 → PBT = 4.5

Tax 20% = 0.9 → Earnings = 3.6

EPS = 3.6 / 10m = 0.36

Price = 3.60 → P/E = 10

Next year:

Interest @6% = 0.6 → PBT = 4.4

Tax 20% = 0.88 → Earnings = 3.52

EPS = 3.52 / 10m = 0.352

Expected P/E = 9.5 → price = 0.352 × 9.5 = 3.344 (≈ 3.34).

Drop = 3.60 − 3.34 = 0.26 → % drop = 0.26 / 3.60 ≈ 7.2%.

Answer: A. Reduction of 7%