CIMA F3 Exam With Confidence Using Practice Dumps

 Revenues are in E$ and F$, costs are in G$, and reporting currency is D$.

 If the D$ strengthens against G$ (option C), then G$ costs translate into fewer D$, so reported costs fall and operating profit margin improves.

 A stronger D$ against E$ or F$ (A or B) reduces the D$ value of sales, hurting margins.

 A weaker D$ against G$ (D) makes G$-denominated costs more expensive in D$, also hurting margins.

So the change that most helps maintain/improve margin is C.

PBIT = $4m

Interest on loan = 10% × $10m = $1m

Profit before tax = $3m

Tax at 20% → earnings after tax = $3m × 0.8 = $2.4m

Use the P/E multiple for the food-processing sector (10x), as this best reflects the business risk and industry.

Equity value = $2.4m × 10 = $24m

Answer: D. $24 million

Current values (before project):

Equity = 1,100

Debt = 500

Firm value = 1,600

Project cost = 200; NPV = +10.

After the project:

Financed by rights issue (equity only)

Equity = 1,310 → increase of 210

But shareholders have to inject 200 cash themselves.

Net gain in shareholder wealth = 210 − 200 = 10

Financed by bond issue (all debt)

Equity = 1,150 → increase of 50

No new equity cash is put in by shareholders.

Net gain in shareholder wealth = 50

This equals: project NPV (10) + tax shield on extra debt (0.20 × 200 = 40).

Financed by mix of debt & equity at existing D/E

Equity = 1,260 → increase of 160

New equity raised ≈ 137 (since extra debt is 63, total 200).

Net gain = 160 − 137 = 23 (NPV 10 + extra tax shield ≈ 13).

The company’s objective is maximisation of shareholder wealth, so it should choose the financing that gives the highest net increase, which is the bond issue (all debt) with a gain of $50m to equity holders.

This is exactly what Modigliani & Miller with corporate tax predicts: increasing gearing creates value for shareholders via the interest tax shield.

Answer: B. $50 million if financed by debt