CIMA Updated F3 Exam Questions and Answers by yaqub

B. New profitable contract improves the company’s credit quality → lower default risk → investors accept a lower yield.

C. Convertible bond gives investors equity upside → they are willing to accept a lower coupon / YTM than on an equivalent straight bond.

A (shorter term) might affect yield, but the effect depends on the yield curve, so it’s less clear-cut.

D (unsecured instead of secured) increases risk, so yield would rise, not fall.

Shares repurchased = 20% × 10m = 2m

Cash used = 2m × $0.75 = $1.5m

Original cash = $2m → decrease = 1.5/2 = 75%

EPS:

Earnings = $2m

Shares before = 10m → EPS = 2/10 = $0.20

Shares after = 8m → EPS = 2/8 = $0.25

Increase in EPS = (0.25 − 0.20)/0.20 = 25%

Answer: B. The cash balance will decrease by 75% and EPS will increase by 25%.

Verified Answer: = C

Comprehensive and Detailed Step by Step Explanation with all CIMA F3: Financial Strategy documents: =

CIMA F3 explains warrants as equity-linked sweeteners often attached to debt issues (such as bonds) to make them more attractive, allowing the issuer to reduce the coupon rate. This aligns directly with statement A, which is therefore correct: warrants are indeed used to “sweeten” a bond and drive down the interest rate.

Statement B is also correct: a warrant gives the holder the right, but not the obligation, to subscribe for a company’s ordinary shares at a fixed exercise price on or before a specified future date. This is a core definition in the F3 syllabus under hybrid and derivative instruments.

Statement D reflects the idea that warrants can be costly to existing shareholders. If the share price in future is well above the exercise price, new shares will be issued at what is effectively a discount, diluting existing shareholders’ value. This is a recognised downside in CIMA discussions of equity-linked incentives.

Statement C is the incorrect one. Warrants are typically detachable and tradeable, but they are not normally redeemable by the issuer at nominal share value at the discretion of the holder. They’re exercised into shares or sold in the market, not “sold back” to the company for par. Hence C is NOT correct.

Questions no: 199044