Free Practice Questions for CIMA F3 Exam

A – Seek a White Knight alternative bidder.

B – Appeal to shareholders, emphasising strong growth prospects and the undesirability of break-up.

D – Inform shareholders about the higher underlying value of assets (including intangibles) to demonstrate undervaluation.

(Competition authorities focus on competition, not redundancies, and giving rights to buy bonds is not a standard or effective takeover defence.)

Current rate: 4.3 £/S

Inflation (annual): S = 2.8%, £ = 4.6%.

Approximate 6-month inflation:

S: 1.4%

£: 2.3%

Forward rate (6 months):

F≈4.3×1.0231.014≈4.3387 £/SF \approx 4.3 \times \frac{1.023}{1.014} \approx 4.3387\ \text{£/S}F≈4.3×1.0141.023​≈4.3387 £/S

Payment: 20,000 S

£ value≈20,000×4.3387≈86,774\text{£ value} \approx 20{,}000 \times 4.3387 \approx 86{,}774£ value≈20,000×4.3387≈86,774

Nearest option: £86,760

Correct answer: C. £86,760

A. Private company buys back the equity shares – VC can sell its shares back to the company → full exit.

C. Company obtains a stock market listing – creates a market for the shares; VC can sell on IPO or in the market → exit.

E. Trade sale of shares to an external 3rd party – classic VC exit route.

A rights issue (B) or stock split (D) do not, by themselves, provide an exit – they just change capital structure or number of shares.

Consider each statement:

A. Foreign tax rate 40% – higher than home 20% → disadvantage.

B. Double tax treaty – avoids double taxation on profits remitted → advantage.

C. 100% Year-1 tax depreciation in foreign country – big early tax shield → advantage.

D. High customs duties on imports into foreign country – makes exporting costly; local production via subsidiary avoids duties → advantage.

E. Restrictions on remitting profits – makes getting cash out difficult → disadvantage.

Answer: B, C, and D

Interest rate swaps are covered in CIMA F3 under risk management and derivative instruments, specifically as tools for managing interest rate risk. An interest rate swap is an agreement between two parties to exchange interest payment obligations, typically swapping fixed-rate interest payments for floating-rate payments, or vice versa, on a notional principal amount.

Option A is TRUE.

CIMA F3 recognises that although swaps are primarily used for hedging, some companies may enter into interest rate swaps for speculative or risk-taking purposes. If management believes it has superior forecasts of future interest rate movements compared to the market, it may deliberately increase exposure to interest rate risk by swapping into floating rates or fixed rates accordingly. This behaviour is discussed in F3 as speculation rather than pure hedging.

Option E is TRUE.

An interest rate swap is an external hedging technique. CIMA F3 clearly distinguishes between:

Internal hedging (e.g. matching assets and liabilities, netting, leading and lagging), and

External hedging, which involves using financial instruments with third parties, such as forwards, futures, options and swaps.

Since a swap involves a counterparty (often a bank or financial institution), it is classified as an external hedge.

The remaining options are incorrect:

B is FALSE. Default risk does not automatically become “high” for the floating-rate payer when interest rates rise; it depends on the firm’s overall financial strength and cash flows. Rising rates increase payments, but not necessarily default risk to a high level.

C is FALSE. When interest rates fall, the fixed-rate payer is at a disadvantage (paying above-market rates), which may increase rather than reduce financial strain.

D is FALSE. An interest rate swap is not an internal hedging technique; it requires an external counterparty.

✅ Final Answer: A and E

Economy = obtaining quality inputs at minimum cost → D

Efficiency = obtaining maximum output from minimum inputs → C ✅

Effectiveness = spending funds so as to achieve the objectives → A

So efficiency is correctly defined by C.

VC wants to exit in 5 years at a significant profit.

A: Buyback at original cost → no profit → not preferred.

B: IPO within 5 years → creates market to sell at premium → preferred.

C: Put option to sell back to company at twice cost → guarantees profit → preferred.

D: Right to sell to any third party if no listing → provides liquidity / exit route → preferred.

E: Management can buy at nominal value → would likely be a loss → not preferred.

Answer: B, C, D

Company pays 3.5% fixed on its borrowing and enters a swap at 3.4–3.5% vs 12-month USD risk-free rate.

To move from fixed to floating, it will receive fixed 3.4% and pay floating (risk-free):

Net interest:

3.5%−3.4%+rf=rf+0.1%3.5\% - 3.4\% + \text{rf} = \text{rf} + 0.1\%3.5%−3.4%+rf=rf+0.1%

Answer to Q102: C – 12-month USD risk-free rate plus 0.1%

This question examines loan covenant compliance, a topic covered in CIMA F3 under Debt Finance, Financial Risk, and Dividend Policy. Loan covenants are contractual restrictions imposed by lenders to protect their interests. Breaching a covenant can trigger penalties or loan repayment demands, so directors must assess compliance carefully using projected financial information.

The company has two covenants:

Interest cover must not fall below 4 times

Retained earnings for the year must not fall below $5.00 million

Step 1: Interest Cover Covenant

CIMA F3 defines interest cover as:

From the projections:

EBIT = $25.00 million

Interest = $3.20 million

Since 7.8 > 4, the company meets the interest cover covenant.

Step 2: Retained Earnings Covenant

Earnings after tax are projected at $15.26 million.

The most recent dividend per share is $0.10, and dividends are planned to increase by 8%:

With 100 million shares in issue:

Retained earnings for the year:

Since $4.46 million < $5.00 million, the company breaches the retained earnings covenant.

Conclusion (CIMA F3 Interpretation)

Interest cover covenant: Complied with

Retained earnings covenant: Breached

Under CIMA F3 guidance, directors must recognise that even when profitability appears strong, dividend policy can cause covenant breaches if distributions are excessive.