CIMA F3 Exam With Confidence Using Practice Dumps

A company has a 5.25% fixed-rate loan and wants to swap it to variable using a swap quoted:

4.50% – 4.55% in exchange for Libor

(Libor currently 4%)

To turn its fixed loan into a synthetic floating-rate loan, the company needs to:

Receive fixed (to offset part of the 5.25% it pays on the loan), and

Pay Libor (to end up with variable cost).

From the swap quote, if the company wants to receive fixed, it gets the lower rate: 4.50% (the bank’s bid rate).

Cash flows:

Pay 5.25% fixed on the loan

Receive 4.50% fixed on the swap

Pay Libor (4.00%) on the swap

Net cost:

5.25%−4.50%+4.00%=0.75%+4.00%=4.75%5.25\% - 4.50\% + 4.00\% = 0.75\% + 4.00\% = 4.75\%5.25%−4.50%+4.00%=0.75%+4.00%=4.75%

✅ Answer to Q28: B. 4.75%

A: Reduce the annual dividend to a more sustainable level

Price controls are expected to be long-term and have cut annual profit from $3bn to $1bn. Continuing to pay a $1.5bn dividend would rely on running down cash and reserves, which is not sustainable. A rational response is to reset the dividend to a level that can be covered by ongoing earnings in the new regulatory environment.

B: Review costs and staffing to find savings

With revenues capped, GDE’s main lever to protect profitability and cash flow is cost efficiency. A thorough review of operating costs and staffing can help offset some of the profit reduction, which supports long-term shareholder value and the ability to pay dividends in future.

C: Seek new revenue streams outside the price controls

Since core electricity prices are constrained, diversifying into related goods and services that are not regulated (e.g. energy services, maintenance contracts, renewables consulting, etc.) is a sensible strategic response. This can grow earnings without breaching the price cap.

Why not D or E?

D: Rights issue to maintain historical dividend levels would mean issuing equity essentially to fund dividends, which destroys shareholder value and signals poor financial discipline.

E: Bringing in a private equity investor is not an obvious or necessary response here; private equity would demand high returns and major restructuring, and it doesn’t directly address the regulatory profit squeeze in the way cost control and new revenue lines do.

 A. The shareholder can choose whether to take the cash or not.

With a repurchase, shareholders can decide to sell (take cash) or keep their shares. A one-off dividend forces all shareholders to receive cash.

 C. It means that the company will be able to pay lower total dividends in the future.

After a buyback there are fewer shares in issue. If the company keeps the same dividend per share, the total dividend outlay falls – good for future cash flow and flexibility.

 E. It will not create an expectation for future increased dividends.

A large one-off dividend may be interpreted as a permanent increase, creating pressure to maintain higher payouts. A buyback is seen as a more one-off, discretionary event, so it avoids that expectation.

 B is wrong: a repurchase reduces, not increases, shares in issue.

 D is not an advantage relative to a dividend – both methods return cash that shareholders can spend as they wish.