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100% Pass 2026 High Pass-Rate CIMA CIMAPRA19-F03-1: Reliable F3 Financial Strategy Study Materials

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CIMA F3 Financial Strategy Sample Questions (Q308-Q313):

NEW QUESTION # 308
A company is currently all-equity financed.
The directors are planning to raise long term debt to finance a new project.
The debt:equity ratio after the bond issue would be 30:60 based on estimated market values.
According to Modigliani and Miller's Theory of Capital Structure without tax, the company's cost of equity would:

A. increase.
B. stay the same.
C. decrease.
D. increase or decrease depending on the bond's coupon rate.

Answer: A

NEW QUESTION # 309
D has US$10 million to invest over 12 months in either USS or GBP Its options are to invest in USS at the present USS interest rate of 10 18%. or to convert the USS to GBP at the spot rate GBP1 =US$1 61 and invest in GBP at an interest rate of 6.4%.
According to the interest rate parity theory, what will the one year forward rate be?
Give your answer to three decimal places.

A. 1.667
B. 1.668

Answer: A

NEW QUESTION # 310
A company has a cash surplus which it wishes to distribute to shareholders by a share repurchase rather than paying a special dividend.
Which THREE of the following statements are correct?

A. Determination of the repurchase price will be easy as shareholders will insist on receiving the open market price.
B. Different tax regimes could result in shareholders having a preference for a share repurchase due to the often more preferential tax treatment of capital gains.
C. The share repurchase could send a negative signal to shareholders as it could be interpreted as a failure of management to find suitable investment opportunities.
D. The share repurchase, if approved by the shareholders, will be binding on all of the company's shareholders.
E. The payment of a special dividend could raise shareholders' expectations of similar distributions in the future, unlike a share repurchase.

Answer: B,C,E

Explanation:
A - True. A special dividend can create expectations of similar future payouts, while a buyback is more clearly one-off.
B - True. A repurchase can be interpreted by some investors as management having no positive-NPV projects, i.e. a possible negative signal about growth opportunities.
C - False. The repurchase price is not automatically the open-market price; it may involve negotiation or a premium/discount.
D - True. In many tax regimes, capital gains (from buybacks) are taxed more favourably than dividend income, so some shareholders may prefer repurchases.
E - False. Even if approved, individual shareholders are usually free to choose whether or not to tender their shares.

NEW QUESTION # 311
A company has convertible bonds in issue.
The following debt is apply (31 December 20X0):
* Conversion ratio- 20 shares for each $130 bond.
* Current share price - $4 50
* Expected annual growth in share price - 5%
Advise the bond Holder at which date the convers on would be worthwhile?

A. 31 December 20X1
B. 31 December 20X3
C. 31 December 20X0
D. 31 December 20X2

Answer: B

Explanation:
Conversion value = (conversion ratio) × (share price).
Share price is expected to grow 5% p.a. from $4.50, so the conversion value rises each year. With a steadily rising price and no other constraints given, a rational bondholder delays conversion as long as possible among the dates offered, to maximise value.
So the most worthwhile of the dates listed is the latest one: 31 December 20X3.

NEW QUESTION # 312
A company is financed by debt and equity and pays corporate income tax at 20%.
Its main objective is the maximisation of shareholder wealth.
It needs to raise $200 million to undertake a project with a positive NPV of $10 million.
The company is considering three options:
* A rights issue.
* A bond issue.
* A combination of both at the current debt to equity ratio.
Estimations of the market values of debt and equity both before and after the adoption of the project have been calculated, based upon Modigliani and Miller's capital theory with tax, and are shown below:

Under Modigliani and Miller's capital theory with tax, what is the increase in shareholder wealth?

A. $50 million if financed by debt
B. $210 million if financed by equity
C. $160 million if financed by a mixture of debt and equity
D. $10 million irrespective of finance

Answer: A

Explanation:
Current values (before project):
Equity = 1,100
Debt = 500
Firm value = 1,600
Project cost = 200; NPV = +10.
After the project:
Financed by rights issue (equity only)
Equity = 1,310 # increase of 210
But shareholders have to inject 200 cash themselves.
Net gain in shareholder wealth = 210 # 200 = 10
Financed by bond issue (all debt)
Equity = 1,150 # increase of 50
No new equity cash is put in by shareholders.
Net gain in shareholder wealth = 50
This equals: project NPV (10) + tax shield on extra debt (0.20 × 200 = 40).
Financed by mix of debt & equity at existing D/E
Equity = 1,260 # increase of 160
New equity raised # 137 (since extra debt is 63, total 200).
Net gain = 160 # 137 = 23 (NPV 10 + extra tax shield # 13).
The company's objective is maximisation of shareholder wealth, so it should choose the financing that gives the highest net increase, which is the bond issue (all debt) with a gain of $50m to equity holders.
This is exactly what Modigliani & Miller with corporate tax predicts: increasing gearing creates value for shareholders via the interest tax shield.

NEW QUESTION # 313
......

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