CIMA F3 Exam With Confidence Using Practice Dumps

Target earnings after tax for 20X2:

8.0m×1.05=8.4m8.0 \text{m} \times 1.05 = 8.4 \text{m}8.0m×1.05=8.4m

Interest on the new bond:

1.0m×4%=0.04m1.0 \text{m} \times 4\% = 0.04 \text{m}1.0m×4%=0.04m

Let required operating profit (PBIT) = XXX.

Profit before tax = X−0.04X - 0.04X−0.04.

Tax at 20% → profit after tax:

Earnings=(X−0.04)×0.8\text{Earnings} = (X - 0.04)\times 0.8Earnings=(X−0.04)×0.8

Set equal to the target 8.4m:

(X−0.04)×0.8=8.4⇒X−0.04=8.40.8=10.5⇒X=10.5+0.04=10.54m(X - 0.04)\times 0.8 = 8.4 \Rightarrow X - 0.04 = \frac{8.4}{0.8} = 10.5 \Rightarrow X = 10.5 + 0.04 = 10.54 \text{m}(X−0.04)×0.8=8.4⇒X−0.04=0.88.4​=10.5⇒X=10.5+0.04=10.54m

So minimum operating profit = $10.54 million.

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.

Increase initially then decrease

This question tests understanding of the traditional theory of capital structure, a core topic within CIMA F3 under Cost of Capital and Capital Structure. The traditional view differs from Modigliani and Miller by arguing that there is an optimal capital structure where a company’s Weighted Average Cost of Capital (WACC) is minimised.

According to traditional theory, at low levels of gearing, introducing debt into the capital structure reduces WACC. This occurs because debt is generally cheaper than equity, largely due to lower risk for lenders and the tax deductibility of interest payments. Initially, equity holders do not perceive a significant increase in financial risk, so the cost of equity remains relatively stable. As a result, replacing some equity with cheaper debt lowers the overall WACC.

However, as gearing continues to rise beyond a certain point, the financial risk borne by both debt holders and equity holders increases substantially. Lenders demand higher interest rates to compensate for increased default risk, and shareholders require a higher return due to greater earnings volatility. This leads to rising costs of both debt and equity. Beyond the optimal gearing level, these rising costs outweigh the benefits of cheaper debt, causing WACC to increase.

CIMA F3 study guidance therefore concludes that under traditional theory, WACC:

Falls initially as gearing increases, and

Rises after the optimal capital structure is exceeded.

Since the directors are increasing gearing toward an industry average, the most appropriate description of WACC behaviour under traditional theory is that it will decrease initially and then increase.