CIMA F3 Exam With Confidence Using Practice Dumps

Under traditional (pre–Modigliani & Miller) capital structure theory, there is an assumed inverse relationship between WACC and company value. The idea is:

As a firm moves towards its optimal capital structure, the WACC falls, and the total value of the firm (equity + debt) rises.

Beyond that optimal point, extra gearing increases financial risk, so the required return from both debt and equity goes up, causing WACC to rise and firm value to fall.

So, within this framework, if a company’s WACC increases, that means it has moved away from its optimal capital structure, and the value of the company will decrease.

Therefore, under traditional theory, an increase in WACC → decrease in company value, so the correct answer is B.

The most appropriate swap is to receive fixed and pay floating on $50 million of the new debt.

Answer: D. Receive fixed pay floating interest rate swap for $50 million.

The company invoices exports in customers’ currencies, so between invoicing and cash receipt it faces transaction risk (actual foreign-currency cash flows to convert).

Because it competes internationally, long-term exchange rate movements can affect sales volumes and margins, so it also faces economic risk.

It has no foreign subsidiaries or overseas balance sheets to translate, so translation risk is not relevant.

Q36