CIMA Updated F3 Exam Questions and Answers by josh

Target earnings (after tax) with 5% growth:

5.0×1.05=5.25 million5.0 \times 1.05 = 5.25 \text{ million}5.0×1.05=5.25 million

Let required operating profit (PBIT) be XXX.

Interest on bond = 7% × 1m = 0.07m

Profit before tax = X−0.07X - 0.07X−0.07

Tax = 30%, so profit after tax:

Earnings=(X−0.07)×(1−0.30)=0.70(X−0.07)\text{Earnings} = (X - 0.07) \times (1 - 0.30) = 0.70(X - 0.07)Earnings=(X−0.07)×(1−0.30)=0.70(X−0.07)

Set equal to earnings target:

0.70(X−0.07)=5.250.70(X - 0.07) = 5.250.70(X−0.07)=5.25 X−0.07=5.250.70=7.50X - 0.07 = \frac{5.25}{0.70} = 7.50X−0.07=0.705.25​=7.50 X=7.50+0.07=7.57 millionX = 7.50 + 0.07 = 7.57 \text{ million}X=7.50+0.07=7.57 million

So the minimum required operating profit is $7.57m (C).

A company is moving from all-equity to a geared structure (D:E = 1:2) with corporate tax.

Using Modigliani & Miller with tax:

ke=ke0+(ke0−kd)(1−T)DEk_e = k_{e0} + (k_{e0} - k_d)(1-T)\frac{D}{E}ke​=ke0​+(ke0​−kd​)(1−T)ED​

Where:

ke0=8%k_{e0} = 8\%ke0​=8% (ungeared cost of equity)

kd=4%k_d = 4\%kd​=4%

T=30%T = 30\%T=30%

D/E=1/2=0.5D/E = 1/2 = 0.5D/E=1/2=0.5

ke=8%+(8%−4%)×0.7×0.5=8%+4%×0.35=8%+1.4%=9.4%k_e = 8\% + (8\% - 4\%) \times 0.7 \times 0.5 = 8\% + 4\% \times 0.35 = 8\% + 1.4\% = 9.4\%ke​=8%+(8%−4%)×0.7×0.5=8%+4%×0.35=8%+1.4%=9.4%

Answer: A. 9.4%

In CIMA F3, a money market hedge is a contractual-style hedge created using the spot rate today plus borrowing/lending in the two currencies to lock in a known domestic-currency outcome for a future foreign-currency receipt or payment. Under interest rate parity, the synthetic forward rate implied by money-market borrowing and lending is broadly consistent with the forward market, so the hedge typically delivers roughly the same outcome as a forward contract (A). Unlike leaving the position unhedged, the money market hedge does not leave the company exposed to currency risk once set up because the future cash flows are effectively fixed through today’s borrow/lend transactions (so B is false). Because a money market hedge can be tailored using available loan/deposit maturities and amounts (and can sometimes be implemented when a forward is unavailable or less convenient), it may be a little more flexible than a forward in practical terms (C). However, it requires multiple steps—borrow or invest, convert at spot, and invest/repay—so it is more complex than a forward contract (D). “Easy to set up” is not usually considered a defining advantage versus forwards because it depends on access to credit lines and money-market instruments (so E is not selected).

Two options for Company A buying B:

Cash offer financed by new debt → increases debt, so gearing goes up.

Share-for-share exchange → issues new shares (equity) instead of increasing debt.

So, relative to a debt-financed cash bid, a share-for-share offer leads to lower gearing (or at least avoids increasing gearing further).

The others are unlikely:

A & B: Using shares instead of (usually cheaper) debt doesn’t generally make EPS or DPS higher.

D: Issuing new shares dilutes control, so there is dilution, not “no dilution”.