Table Of ContentCIMA Exam Practice Kit
F3 – Financial Strategy
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CIMA Exam Practice Kit
F3 – Financial Strategy
John Ogilvie
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Contents
Syllabus Guidance, Learning Objectives and Verbs xi
Paper F3 – Financial Strategy xv
Examination Techniques xxi
Part 1 Formulation of Financial Strategy 1
1 Formulation of Financial Strategy 3
Financial and non-financial objectives 5
The three key decisions of financial management 5
Dividend policy and dividend decisions 6
External constraints on financial strategy 6
Use of financial analysis 6
Profitability ratios 6
Modelling and forecasting cash flows and financial statements 7
Sensitivity analysis 7
Questions 8
Question 1 – Objectives 8
Question 2 – Educational 8
Question 3 – Police 9
Question 4 – Healthcare 10
Question 5 – RJ 11
Answers 14
Question 1 – Objectives 14
Question 2 – Educational 15
Question 3 – Police 17
Question 4 – Healthcare 18
Question 5 – RJ 20
Part 2 Financial Management 25
2 Financial Management 27
Investor ratios 29
Operating cycle 29
Working capital management strategies 30
Operation of the securities markets 30
Efficient market hypothesis 30
v
vi Contents
The role of the treasury function 30
Questions 31
Question 1 – ZX Inc. 31
Question 2 – UR 32
Question 3 – Hotel (Practice Question) 33
Question 4 – ML 33
Question 5 – XYZ training 34
Question 6 35
Answers 38
Question 1 – ZX Inc. 38
Question 2 – UR 40
Question 3 – Hotel 41
Question 4 – ML 41
Question 5 – XYZ training 43
Question 6 45
3 Sources of Long-term Finance 47
Types of long-term finance 49
Criteria for selecting a source of finance 49
Issue of shares to new shareholders 49
Rights issues 50
Considerations when issuing debt 50
Lease or buy decision 50
Funding of SMEs 50
Questions 52
Question 1 – 52
Question 2 – 52
Question 3 – PJH 53
Question 4 – VID 54
Question 5 – Rump 55
Question 6 – RZ 56
Question 7 – EFG 57
Question 8 – TFC 58
Answers 60
Question 1 – 60
Question 2 – 61
Question 3 – PJH 63
Question 4 – VID 65
Question 5 – Rump 66
Question 6 – RZ 67
Question 7 – EFG 69
Question 8 – TFC 72
4 Capital Structure and Cost of Capital 75
Cost of equity 77
Capital asset pricing model (CAPM) 78
Cost of debt 78
Weighted average cost of capital (WACC) 78
Assumptions and use of WACC 79
Contents vii
Financial risk and the cost of capital 79
Business risk and the cost of capital 80
Questions 82
Question 1 – LS 82
Question 2 – CAP 83
Question 3 – WEB 84
Question 4 – REM 85
Question 5 – DEB 86
Question 6 – Imlico 87
Question 7 88
Question 8 89
Answers 90
Question 1 – LS 90
Question 2 – CAP 91
Question 3 – WEB 92
Question 4 – REM 93
Question 5 – DEB 95
Question 6 – Imlico 96
Question 7 97
Question 8 99
Part 3 Investment Decisions and Project Control 105
5 Valuations 107
Asset valuations 109
Intellectual capital 109
Present value of future cash flows 109
Price/earnings ratio 109
Dividend valuation model 110
Dividend yield 110
General comments 110
Questions 111
Question 1 – Target (Practice Question) 111
Question 2 – CD 111
Question 3 – EQU 112
Question 4 – MediCons plc 113
Question 5 – BiOs 115
Question 6 – AB Telecoms 116
Answers 119
Question 1 – Target 119
Question 2 – CD 119
Question 3 – EQU 121
Question 4 – MediCons 122
Question 5 – BiOs 124
Question 6 – AB Telecoms 126
6 Mergers, Acquisitions and Buyouts 131
Synergy 133
Forms of consideration for acquisitions 134
Hostile bids and defence strategies 134
Management buyouts (MBOs) and venture capitalists 134
viii Contents
Questions 135
Question 1 – Company A (Practice Question) 135
Question 2 – PR 135
Question 3 – AB plc 136
Question 4 – TDC 137
Question 5 – RD 138
Question 6 – PCO plc 139
Question 7 – FS 141
Question 8 – VCI 143
Answers 145
Question 1 – Company A 145
Question 2 – PR 145
Question 3 – AB plc 146
Question 4 – TDC 147
Question 5 – RD 149
Question 6 – PCO plc 150
Question 7 – FS 151
Question 8 – VCI 156
Part 4 Investment Decisions and Project Control 159
7 Investment Appraisal Techniques 161
Appraisal methods 163
Asset replacement 164
Capital rationing 164
Questions 165
Question 1 – ZX Rationing 165
Question 2 – Expansion 165
Question 3 – RST 166
Question 4 – CD Furniture 167
Answers 169
Question 1 – ZX rationing 169
Question 2 – Expansion 169
Question 3 – RST 170
Question 4 – CD Furniture 173
8 Advanced Investment Appraisal Techniques 177
Relevant costs in a net present value 179
Uncertainty 180
Capital investment real options 180
Post-implementation audits 181
Questions 182
Question 1 – Rock (Practice Question) 182
Question 2 – X training 182
Question 3 – HS and IT 184
Question 4 – SS 184
Question 5 185
Contents ix
Answers 187
Question 1 – Rock 187
Question 2 – X training 187
Question 3 – HS and IT 188
Question 4 – SS 190
Question 5 191
9 Financing and Appraisal of International Investments 195
Techniques for dealing with cash flows denominated in a foreign currency 197
Short-term hedging strategies 197
Identifying financing requirements 198
Questions 199
Question 1 – GH 199
Question 2 – KH 200
Question 3 – TMC 200
Question 4 – AB overseas 202
Answers 203
Question 1 – GH 203
Question 2 – KH 204
Question 3 – TMC 205
Question 4 – AB overseas 206
Part 5 Case Studies and Exam Papers 209
10 Case Study Questions 211
Questions 214
Question 1 – KL Group 214
Question 2 – Dobbs 216
Question 3 – C&C 219
Question 4 – Hi-Clean 222
Question 5 – JHC Group 224
Question 6 – GAS plc 227
Question 7 – PM Industries 230
Question 8 – SHINE 233
Answers 237
Question 1 – KL Group 237
Question 2 – Dobbs 240
Question 3 – C&C Airlines 242
Question 4 – Hi-Clean 245
Question 5 – JHC Group 248
Question 6 – GAS plc 252
Question 7 – PM Industries 259
Question 8 –SHINE 266
Exam Q & As 273
