F3 Exam Dumps - CIMA Strategic Questions and Answers

We’re looking for long-term changes that would improve a company’s credit rating (i.e. reduce perceived credit risk and increase capacity to service debt):

A. Increase in interest cover (EBIT / interest) → higher coverage, safer for lenders → positive.

B. Decrease in (Net debt)/(EBITDA) → lower leverage relative to earnings → positive.

C. Increase in free cash flow from operations → more internally generated cash to pay interest and repay debt → positive.

D. Decrease in (Book debt)/(Book equity) is also a good sign in reality, but the question restricts us to three; exam focus is usually on coverage and cash flow-based ratios, so A, B and C are the best three.

E. Decrease in dividend cover (earnings / dividend) means paying a larger proportion of earnings out as dividends → less retained profit and weaker protection for creditors → negative for credit rating.

So the three most likely to improve the rating: A, B, C.

 A. The corporate tax rate in country P is 40%.

Tax in P (40%) is higher than in T (20%), so moving profits to P via a subsidiary gives a tax disadvantage, not an advantage.

 B. There are restrictions on companies wishing to remit profit from country P

That makes it harder to get cash out of P – this is a disadvantage of having a subsidiary there.

 C. Year 1 tax depreciation allowances of 100% are available in country P. ✅

This is very attractive for an investment in a manufacturing subsidiary. A 100% first-year allowance means the company can deduct the full cost of qualifying assets immediately, reducing taxable profit and tax in early years. That’s a clear advantage to setting up in P.

 D. There is a double tax treaty between country T and country P. ✅

A double tax treaty usually prevents the same profits being taxed twice and provides tax credits/relief for foreign taxes. This especially matters when you operate via a foreign subsidiary. So it’s an advantage to establishing a subsidiary in P.

 E. There are high customs duties payable on products entering country P. ✅

If the company exports directly from T, it pays high customs duties into P. If it manufactures inside P via a subsidiary, those import duties are avoided. So high customs duties on imports are an argument in favour of local production via a subsidiary – a clear advantage of establishing the subsidiary.

Use CAPM:

10%=1%+β(7%−1%)⇒0.10=0.01+0.06β⇒β=0.09/0.06=1.510\% = 1\% + \beta(7\% - 1\%) \Rightarrow 0.10 = 0.01 + 0.06\beta \Rightarrow \beta = 0.09/0.06 = 1.510%=1%+β(7%−1%)⇒0.10=0.01+0.06β⇒β=0.09/0.06=1.5.

Beta > 1 ⇒ higher risk than the market.

Answer: A. It has greater risk than the average market risk.

Current rate: 4.3 £/S

Inflation (annual): S = 2.8%, £ = 4.6%.

Approximate 6-month inflation:

S: 1.4%

£: 2.3%

Forward rate (6 months):

F≈4.3×1.0231.014≈4.3387 £/SF \approx 4.3 \times \frac{1.023}{1.014} \approx 4.3387\ \text{£/S}F≈4.3×1.0141.023​≈4.3387 £/S

Payment: 20,000 S

£ value≈20,000×4.3387≈86,774\text{£ value} \approx 20{,}000 \times 4.3387 \approx 86{,}774£ value≈20,000×4.3387≈86,774

Nearest option: £86,760

Correct answer: C. £86,760

Current KKA share price = $5.00

Cash offer: $5.75 per share

Premium = (5.75 − 5.00) / 5.00 = 0.75 / 5 = 15%

Bond offer: market value $90 bond for 15 KKA shares

Value per KKA share = 90 / 15 = $6.00

Premium = (6.00 − 5.00) / 5.00 = 1 / 5 = 20%

The highest premium is therefore 20% on the bond offer, i.e. option B.

Under IAS 39, a derivative such as a forward contract must always be measured at fair value in the statement of financial position. When that derivative is designated as a cash flow hedge of a highly probable forecast transaction and hedge accounting criteria are met, the effective portion of the gain or loss on the hedging instrument is recognised in Other Comprehensive Income (OCI), not in profit or loss.

Here, by 31 December 20X3 the forward contract (entered at nil cost) has a positive fair value of $10,000, so there is a gain of $10,000. Because the hedge has been correctly designated as a cash flow hedge, that gain is treated as part of the cash flow hedge reserve in equity via OCI. It will be recycled to profit or loss in a later period when the hedged transaction affects profit or loss (e.g. when the forecast foreign currency transaction occurs).

So for the year ended 31 December 20X3, the correct treatment is to recognise a $10,000 gain in OCI – answer D.

The division is loss-making, with poor management and obsolete assets. It needs a $20m investment, but PV of future cash flows is only $15m → negative NPV of –$5m if retained.

The company wants to raise cash, so methods that don’t raise cash (de-merger, spin-off) are inappropriate.

Trade sale (C): sell the division to another company that may be better able to invest/manage it – brings in cash.

Liquidation (D): close the division and sell the assets – also raises cash and avoids further losses.

MBO (A) is unlikely, since current management is identified as part of the problem.

Answer: C and D

Value for Money is usually assessed using the 3 Es:

Economy – acquiring inputs at the lowest cost for a given quality (they pay less than other schools, so economy is actually good).

Effectiveness – achieving objectives (exam pass rates are high, so effectiveness is good).

Efficiency – the relationship between outputs and inputs (how well resources are turned into results).

Here, small class sizes mean more teaching resource per pupil. Even though results are good, they’re achieved with relatively high input (lots of teacher time per pupil), indicating weaker efficiency, not economy or effectiveness.