CIMA Updated F3 Exam Questions and Answers by frazer

 G plc will borrow at base + 0.75% → 7.50% + 0.75% = 8.25%.

 To hedge, as a future borrower it uses the 6v9 FRA offer rate = 6.90%.

 Difference between actual base and FRA = 7.50% − 6.90% = 0.60%.

 Interest difference over 3 months on $5m = 0.006 × ¼ × 5,000,000 = $7,500 (received from FRA).

 Net interest paid = 8.25% interest − 0.60% benefit = 7.65% effective rate.

Cash flows:

Years 1–3: 100, 100, 100

From year 4: grow at 2% forever. Cost of capital = 12%.

PV of years 1–3:

PV1−3=1001.12+1001.122+1001.123≈240\text{PV}_{1-3} = \frac{100}{1.12} + \frac{100}{1.12^2} + \frac{100}{1.12^3} \approx 240PV1−3​=1.12100​+1.122100​+1.123100​≈240

Terminal value at end of year 3:

Year 4 CF = 100×1.02=102100 \times 1.02 = 102100×1.02=102

TV3=1020.12−0.02=1020.10=1,020\text{TV}_3 = \frac{102}{0.12 - 0.02} = \frac{102}{0.10} = 1{,}020TV3​=0.12−0.02102​=0.10102​=1,020

PV of terminal value:

PV(TV)=1,0201.123≈726\text{PV(TV)} = \frac{1{,}020}{1.12^3} \approx 726PV(TV)=1.1231,020​≈726

Total value ≈ 240+726=966240 + 726 = 966240+726=966.

So the value is $966 million → Option A.

Likely outcomes after two listed companies in the same industry merge:

A. Increase in customer base – yes, customers of both firms now belong to the combined entity.

B. Competition authorities step in to stop… – that usually happens before or to prevent the merger, not “after it has happened”, so not chosen.

C. Decrease in employee motivation due to internal changes – very common effect of mergers (uncertainty, restructuring).

D. Changes to supplier relationships owing to internal changes – the merged firm will have different bargaining power and processes; very likely.

E. Cost savings from synergistic benefits and economies of scale – one of the main motives for merger.

Answer: A, C, D, E