CIMA F3 Exam With Confidence Using Practice Dumps

Translation risk arises when the foreign subsidiary’s net assets (in BS) are translated into the parent’s currency (A$). The most effective hedge is to match those net assets with liabilities in the same foreign currency. By financing the acquisition with BS borrowings, AAB creates a BS liability that offsets BBA’s BS net assets, reducing the net exposure to translation movements.

A$: equity in A$ doesn’t hedge BS assets.

Multi-currency bank accounts and forward contracts mainly address transaction risk, not long-term translation of balance sheet net assets.

Advantages of a debt-funded cash offer vs a share exchange:

A. Shareholder control will remain with AB’s current shareholders.

B. More of the synergistic benefits will accrue to AB’s current shareholders.

D. EPS will increase (no dilution of equity; if synergies materialise, earnings are spread over the same number of shares).

Answer: A, B, D

CIMA F3 examines acquisition financing choices under Financial Policy Decisions and Mergers and Acquisitions, with a particular focus on how cash offers versus share exchanges affect shareholder wealth, control, gearing and earnings. The key issue from the perspective of Company AB’s shareholders is whether the method of financing enhances shareholder value without undermining the firm’s optimal capital structure.

A debt-funded cash offer involves Company AB raising debt to pay cash to the shareholders of Company DC. In contrast, a share exchange issues new equity, diluting existing ownership.

Option A is an advantage.

CIMA F3 highlights that a cash offer allows existing shareholders to retain control, because no new shares are issued. With a share exchange, ownership and voting power are diluted as DC’s shareholders become part-owners of the combined company.

Option B is an advantage.

Under a cash offer, all future synergies accrue to AB’s existing shareholders. F3 explains that with a share exchange, synergy benefits are shared with the target’s shareholders through their new equity stake. Therefore, a debt-funded cash offer concentrates the upside of synergies with the acquirer’s shareholders.

Option D is an advantage.

CIMA F3 notes that debt financing can lead to EPS growth, provided the return on the acquisition exceeds the cost of debt. Because no new equity is issued, earnings are spread over the same number of shares, and financial gearing magnifies returns to equity holders.

The remaining options are not advantages:

C (Gearing will increase) is a consequence, not an advantage. Since AB is already at its optimum capital structure, higher gearing increases financial risk.

E is incorrect; increasing WACC would reduce shareholder value, not enhance it.

CIMA F3 clearly states that acquisitions enhance shareholder wealth only if they create real economic value, not just strategic or reputational benefits.

A. Press coverage – ✘

Media exposure does not directly generate cash flows or economic value.

B. New opportunities for employees – ✘

While beneficial socially, this does not directly enhance shareholder wealth unless it improves profitability.

C. Cultural diversity – ✘

CIMA F3 treats this as a soft benefit with no guaranteed financial return.

D. Acquiring Intellectual Property – ✔

IP can generate monopoly power, licensing income, and sustainable competitive advantage, directly increasing future cash flows.

E. Exploiting production synergies – ✔

Cost savings and operational efficiencies are a primary source of acquisition value highlighted throughout the F3 syllabus.

F. Elimination of competition – ✔

Reduced competition can increase pricing power and market share, improving long-term profitability and shareholder value.