CIMA F3 Exam With Confidence Using Practice Dumps

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.

A. Equity instead of debt reduces financial risk → ✅ True

B. Equity will create pressure for higher future DPS → too strong / not necessarily always → ❌

C. Debt always increases EPS → only if returns > cost of debt → ❌

D. Retained earnings is the cheapest form of equity finance (no issue costs) → ✅ True

E. More debt → higher financial risk → higher cost of equity (MM with gearing) → ✅ True

F. Debt is always preferable → clearly ❌

Correct three:

A, D, E\boxed{A,\ D,\ E}A, D, E​

A. Any opportunity to benefit from future exchange rate movements is lost.

True – a money market hedge locks in the effective exchange rate now, so you remove both downside risk and upside potential.

B. It can be tailored to match the size of the payment.

True – you can structure the borrowing/lending and FX transaction to exactly match the foreign currency amount due.

C. It manages transaction risk.

True – transaction risk (uncertainty in the home currency value of a known future foreign-currency cash flow) is what a money market hedge directly addresses.

D. It offers a significantly better outcome than a forward contract.

False – under interest rate parity, a money market hedge and a forward contract should give similar effective rates (ignoring spreads and costs).

E. It avoids the need to find immediate finance.

False – for a payable, you normally borrow or use cash now as part of the hedge, so it does not avoid immediate financing; it actually requires it.

✅ Answer to Q29: A, B, C