CIMA F3 Exam With Confidence Using Practice Dumps

Current debt interest:

Existing: 5m×8%=0.40m5\text{m} \times 8\% = 0.40\text{m}5m×8%=0.40m

New: 2m×10%=0.20m2\text{m} \times 10\% = 0.20\text{m}2m×10%=0.20m

Total interest = 0.60m

Let annual sales = SSS.

Operating profit margin = 20% → OP = 0.20 S.

Interest cover covenant:

0.20S0.60≥4⇒0.20S≥2.4⇒S≥2.40.20=12.0 million\frac{0.20 S}{0.60} \ge 4 \Rightarrow 0.20 S \ge 2.4 \Rightarrow S \ge \frac{2.4}{0.20} = 12.0\ \text{million}0.600.20S​≥4⇒0.20S≥2.4⇒S≥0.202.4​=12.0 million

Correct answer: A. $12.00 million

Company X is an established, unquoted, specialist IT advisory firm with steady results, predictable dividends and cashflows. Company P is only buying 30% (a minority stake).

B. Dividend based using DVM – Very suitable because dividends are predictable and regular. For a minority stake, dividends are often the main measurable return, so a dividend valuation model is appropriate.

C. Cash based using free cash flow before interest – A DCF valuation based on free cash flow to the firm is also appropriate for a profitable, growing, going concern. You can value the whole business using FCFF and then take 30% of the equity value.

Asset-based (A) is less relevant for a specialist service company with relatively few tangible assets. P/E-based methods (D and E) are less ideal given there are few direct competitors, making comparables unreliable.

Given current structure: D:E = 25:75, tax = 25%, asset beta ≈ 1.01.

Re-gear beta for new structure D:E = 35:65

βe′=βa[1+(1−T)DE]=1.01[1+0.75×3565]≈1.01×1.404≈1.42\beta_e' = \beta_a \big[1 + (1 - T)\frac{D}{E}\big] = 1.01 \big[1 + 0.75 \times \frac{35}{65}\big] \approx 1.01 \times 1.404 \approx 1.42βe′​=βa​[1+(1−T)ED​]=1.01[1+0.75×6535​]≈1.01×1.404≈1.42

Use CAPM with rf=4%r_f = 4\%rf​=4%, rm=12%r_m = 12\%rm​=12%:

ke′=rf+βe′(rm−rf)=4%+1.42×8%≈4%+11.4%≈15.4%k_e' = r_f + \beta_e'(r_m - r_f) = 4\% + 1.42 \times 8\% \approx 4\% + 11.4\% \approx 15.4\%ke′​=rf​+βe′​(rm​−rf​)=4%+1.42×8%≈4%+11.4%≈15.4%

Closest option: 15.36% → B.