Free Practice Questions for CIMA F3 Exam

PPP says identical goods should cost the same when prices are expressed in a common currency, but in reality transport costs, taxes, tariffs, and market imperfections can allow differences to persist.

Answer: C. Economic forces should eliminate the price difference, but imperfections may permit it to persist.

 Interest cover = PBIT / Interest = 20 / 5 = 4 times ≥ 3 ⇒ covenant met.

 Next year dividend per share = 0.04 × 1.10 = 0.044.

Total dividend = 0.044 × 200m = 8.8m.

Retained earnings = Earnings – Dividends = 12 – 8.8 = 3.2m < 3.5m ⇒ retained-earnings covenant breached only.

IFRS 7 requires detailed disclosures of financial instrument risks, specifically:

Credit risk – exposure to counterparties failing to meet obligations.

Market risk – currency, interest rate, and other price risks.

Liquidity risk – ability to meet obligations as they fall due.

Business risk and enterprise risk are broader strategic concepts, not the focus of IFRS 7.

✅ Answer: A, C, and E

PPP fails in practice when prices of goods can’t equalise across countries because of frictions or structural differences:

B. Consumer tastes – different baskets of goods, so the “same” price index isn’t really comparable.

D. Import tariffs – artificial price wedges created by governments.

E. Transport costs – make it impossible to arbitrage price differences away fully.

Arbitrage (A) actually helps PPP hold, not prevents it, and differing tax regimes (C) are less central in standard PPP discussions than tariffs and transport.

✅ Answer Q122: B, D, E

Current situation:

Earnings = $2m

P/E = 10 → Market value = 2 × 10 = $20m

After expansion:

Earnings increase by 25% → new earnings = 2 × 1.25 = $2.5m

New P/E = 8 → New market value = 2.5 × 8 = $20m

Shareholder wealth (equity value) stays at $20m, so the **most likely change is:

D. No change in shareholder wealth.**

Net book value of equity = $20m

Net realisable value of equity = $25m

Free cash flow to equity = $3.5m indefinitely

Cost of equity (ke) = 10%

Value from FCFE (perpetuity):

Vequity=3.50.10=35mV_{\text{equity}} = \frac{3.5}{0.10} = 35\text{m}Vequity​=0.103.5​=35m

A reasonable minimum is the break-up / net realisable value = $25m.

A reasonable maximum is the going-concern DCF value = $35m.

Answer: A. Minimum $25.0m, maximum $35.0m

They need cash within 6 months and Divisions A and B are core. Options:

A. Sale of Division B – sells a core division; strategically undesirable.

B. Closure of a division – doesn’t raise cash, likely costs cash (redundancies, closure costs).

C. Management buy-out of Division C – disposes of a non-core asset, raises cash, and there is known management interest. ✅

D. Demerger of Division C – typically does not raise cash; it just separates ownership.

So the most suitable exit strategy is C.

This question applies the Price/Earnings (P/E) valuation method, which is covered in CIMA F3 under Business Valuation and Market-Based Valuation Techniques. The P/E method is commonly used to value unlisted companies by reference to a comparable listed company operating in the same industry, provided that earnings are representative and sustainable.

Under CIMA F3 guidance, when using a P/E multiple:

The earnings figure used should be the most recent maintainable earnings.

The P/E ratio should be taken from a listed comparator with similar business risk.

The valuation focuses on equity value, not enterprise value.

In this scenario, the unlisted company reported earnings of $6 million in the last financial year. A listed company in the same industry has a P/E ratio of 11, which is assumed to appropriately reflect market expectations regarding growth and risk for businesses in this sector.

The valuation is therefore calculated as follows:

This gives an estimated equity value of $66 million.

It is important to note, in line with CIMA F3 principles, that balance sheet items such as retained earnings, share capital, and revaluation reserves are not directly relevant to a P/E-based valuation. The P/E approach is an income-based valuation method, relying solely on earnings and market multiples, rather than book values.

Rounding to the nearest whole number, as required by the question, confirms the final valuation.

At the rumour stage (pre-bid), suitable defences are pre-emptive ones:

A – Communicate effectively with shareholders: build support and explain strategy to keep the share price fair and reduce vulnerability.

B – Revalue non-current assets: helps ensure the shares are not undervalued and makes any bid look less attractive.

D – Poison pill: introduce mechanisms (e.g. rights issues to existing shareholders) that make a hostile bid very costly.

C (competition authorities) and E (white knight) are reactive and typically used only once an actual bid has been made.

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.