CIMA F3 Exam With Confidence Using Practice Dumps

A – Retained earnings: When you value equity by discounting cash flows to equity, the result already represents the total value of equity. You don’t then add book retained earnings on top – that would double-count equity.

B – Deducting $400m for the bond: With a FCFE valuation you do not deduct the value of debt at all – the cash flows are already after interest and principal. So deducting the bond is wrong, and in any case they used nominal value ($400m) instead of market value ($380m).

C – Using WACC: Cash flows to equity must be discounted at the cost of equity, not at WACC. WACC is used only when discounting free cash flow to the firm.

Using cash flows to equity (D) is fine, and deducting replacement capex (E) is correct because only free cash after maintaining assets belongs to shareholders.

At the rumour stage (pre-bid), suitable defences are pre-emptive ones:

A – Communicate effectively with shareholders: build support and explain strategy to keep the share price fair and reduce vulnerability.

B – Revalue non-current assets: helps ensure the shares are not undervalued and makes any bid look less attractive.

D – Poison pill: introduce mechanisms (e.g. rights issues to existing shareholders) that make a hostile bid very costly.

C (competition authorities) and E (white knight) are reactive and typically used only once an actual bid has been made.

Company B (all equity):

Cost of equity = asset return = Ku = 17%

Company A:

Gearing D:E = 1:2 → D/E = 0.5

Pre-tax cost of debt Kd = 7%

Tax rate T = 30%

Levered cost of equity with tax:

Ke=Ku+DE(1−T)(Ku−Kd)K_e = K_u + \frac{D}{E}(1 - T)(K_u - K_d)Ke​=Ku​+ED​(1−T)(Ku​−Kd​) Ke=17%+0.5×0.7×(17%−7%)=17%+0.5×0.7×10%=17%+3.5%=20.5%K_e = 17\% + 0.5 \times 0.7 \times (17\% - 7\%) = 17\% + 0.5 \times 0.7 \times 10\% = 17\% + 3.5\% = 20.5\%Ke​=17%+0.5×0.7×(17%−7%)=17%+0.5×0.7×10%=17%+3.5%=20.5%

✅ Correct: A. 20.5%