CIMA Financial Strategy F3 Syllabus
The F3 syllabus covers the main elements necessary for the design and management of an organisations financial strategy. These elements are understood in terms of their ability to drive progress towards reaching organisational objectives whilst working within the regulatory and investment environment. Candidates develop an understanding of the main financing instruments and the different types of investment decision and the appreciation of broader strategic issues.
The syllabus is divided into three sections and each section has its own recommended study weighting as suggested by CIMA with regards to assessment requirements. The study weighting is listed beside each section title.
A. FORMULATION OF FINANCIAL STRATEGY (25%)
• The financial and non-financial objectives of different organisations (e.g. value for money, maximising shareholder wealth, providing a surplus).
• The three key decisions of financial management (investment, financing and dividend) and their links.
• Benefits of matching characteristics of investment and financing in the longer term, (e.g. in cross-border investment) and in short-term hedging strategies.
• Considerations in the formulation of dividend policy and dividend decisions, including meeting the cash needs of the business.
• External constraints on financial strategy (e.g. funding, regulatory bodies, investor relations, strategy, and economic factors).
• Developing financial strategy in the context of regulatory requirements (e.g. price and service controls exercised by industry regulators) and international operations.
• The implications of regulation for business combinations. (Note: Detailed knowledge of the City Code and EU competition rules will not be tested).
• The financial objectives of an organisation and economic forces affecting its financial plans (e.g. interest, inflation and exchange rates).
• Assessing attainment of financial objectives.
• Use of financial analysis in the external assessment of a company (e.g. in assessing creditworthiness and compliance with financing covenants).
• Modelling and forecasting cash flows and financial statements based on expected values for economic variables (e.g. interest rates) and business variables (e.g. volume and margins) over a number of years.
• Analysis of sensitivity to changes in expected values in the above models and forecasts.
• Assessing the implications for shareholder value of alternative financial strategies, including dividend policy. (Note: Modigliani and Miller’s theory of dividend irrelevancy will be tested in broad terms. The mathematical proof of the model will not be required, but some understanding of the graphical method is expected).
• The lender’s assessment of creditworthiness.
• Current and emerging issues in financial reporting (e.g. proposals to amend or introduce new accounting standards) and in other forms of external reporting (e.g. environmental accounting).
B. FINANCING DECISIONS (30%)
• Identifying financing requirements (both in respect of domestic and international operations) and the impacts of different types of finance on models and forecasts of performance and position.
• Working capital management strategies. (Note: No detailed testing of cash and stock management models will be set since these are covered at a lower level within the syllabus).
• Types and features of domestic and international long-term finance: share capital (ordinary and preference shares, warrants), long-term debt (bank borrowing and forms of securitised debt, e.g. convertibles) and finance leases, and methods of issuing securities.
• The operation of stock exchanges (e.g. how share prices are determined, what causes share prices to rise or fall, and the efficient market hypothesis). (Note: No detailed knowledge of any specific country’s stock exchange will be tested).
• The impact of changing capital structure on the market value of a company. (Note: An understanding of Modigliani and Miller’s theory of gearing, with and without taxes, will be expected, but proof of their theory will not be examined).
• The capital asset pricing model (CAPM): calculation of the cost of equity using the dividend growth model (knowledge of methods of calculating and estimating dividend growth will be expected), the ability to gear and un-gear betas and comparison to the arbitrage pricing model.
• The ideas of diversifiable risk (unsystematic risk) and systematic risk. (Note: use of the two-asset portfolio formula will not be tested).
• The cost of redeemable and irredeemable debt, including the tax shield on debt.
• The weighted average cost of capital (WACC): calculation, interpretation and uses.
• The lease or buy decision (with both operating and finance leases).
• Criteria for selecting sources of finance, including finance for international investments.
• The effect of financing decisions on balance sheet structure and on ratios of interest to investors and other financiers (gearing, earnings per share, price-earnings ratio, dividend yield, dividend cover gearing, interest cover).
• The role of the treasury function in terms of setting corporate objectives, liquidity management, funding management, and currency management.
• The advantages and disadvantages of establishing treasury departments as profit centres or cost centres, and their control.
C. INVESTMENT DECISIONS AND PROJECT CONTROL (45%)
• Identification of a project’s relevant costs (e.g. infrastructure, marketing and human resource development needs), benefits (including incremental effects on other activities as well as direct cash flows) and risks (i.e. financial and non-financial, including reputation risk arising from ethical considerations and risks of legal change or uncertainty).
• Linking investments with customer requirements and product/service design.
• Linking investment in IS/IT with strategic, operational and control needs (particularly where risks and benefits are difficult to quantify).
• Calculation of a project’s net present value and internal rate of return, including techniques for dealing with cash flows denominated in a foreign currency and use of the weighted average cost of capital.
• The modified internal rate of return based on a project’s “terminal value” (reflecting an assumed reinvestment rate).
• The effects of taxation (including foreign direct and withholding taxes), potential changes in economic factors (inflation, interest and exchange rates) and potential restrictions on remittances on these calculations.
• Recognising risk using the certainty equivalent method (when given a risk free rate and certainty equivalent values).
• Adjusted present value. (Note: The two step method may be tested for debt introduced permanently and debt in place for the duration of the project).
• Valuation bases for assets (e.g. historic cost, replacement cost and realisable value), earnings (e.g. price/earnings multiples and earnings yield) and cash flows (e.g. discounted cash flow, dividend yield and the dividend growth model).
• The strengths and weaknesses of each valuation method and when each is most suitable, e.g. by reference to type of investee organisation (service, capital intensive etc).
• Forms of intangible asset (including intellectual property rights, brands etc) and methods of valuation.
• Application of the efficient market hypothesis to business valuations.
• Selection of an appropriate cost of capital for use in valuation.
• Capital investment real options (i.e. to make follow-on investment, abandon or wait).
• Single period capital rationing for divisible and non-divisible projects. (Note: Multi-period rationing will not be tested).
• Recognition of the interests of different stakeholder groups in mergers, acquisitions and company valuations.
• The reasons for merger or acquisitions (e.g. synergistic benefits).
• Forms of consideration and terms for acquisitions (e.g. cash, shares, convertibles and earn-out arrangements), and their financial effects.
• The post-merger or post-acquisition integration process (e.g. management transfer and merger of systems).
• The function/role of management buy-outs and venture capitalists.
• Types of exit strategy and their implications.
• The reasons for (e.g. strategic change, opportunity cost of investment) and mechanisms of demerger or divestment.
• Project implementation and control in the conceptual stage, the development stage, the construction stage and initial manufacturing/operating stage.
• Post completion audit of investment projects.
CIMA Financial Strategy F3 Past Papers
All strategic level assessments have two sections with the first utilising a common case-study scenario. Section B, however, requires TWO out of three questions to be completed. One sample past paper question has been provided to help demonstrate the types of questions that can arise in a typical F3 exam. The question has two parts.
Information on AAA
AAA is a large, listed entity located in a country in Europe. It operates in the food retail industry with a network of large superstores and smaller convenience stores throughout the country. The head office is in a relatively small town in the north of the country where the first store was located 50 years ago. This is at the other end of the country from the capital city which is located in the south.
AAA’s main financial objective is to maximise shareholder returns. However, in its annual report, AAA also lists a number of non-financial objectives that include:
• Providing an attractive shopping experience;
• Sourcing products in an environmentally friendly manner;
• Treating suppliers fairly.
AAA is investigating the possibility of acquiring a competitor retail chain in the same country and this would require a substantial investment. AAA currently has total assets of $10billion and a gearing ratio of 40% (debt to debt plus equity), which reflects the industry average.
Information on BBB
BBB is a charitable entity set up by a single wealthy benefactor 20 years ago, with the objective of relieving human suffering by pursuing excellence in research into methods of treating cancer. Continuing funding for this work is obtained through donations received from members of the public and some limited funding from government grants.
BBB’s main financial objectives are:
• To maintain or increase funding year-on-year
• To use available funding in an effective and efficient manner
(i) Compare and contrast the criteria used in setting:
• the financial objectives
• the non-financial objectives for these two entities, with reference to the different stakeholder groups.
(ii) Describe the consequences of each entity failing to meet its financial objectives.
(Total for Part (a) = 13 marks)
XY is a private entity in a high technology industry. The founding shareholders still own the majority of shares and continue to manage the business. Many of XY’s employees are also shareholders, having been given shares as bonuses. To date, none of the shareholders has attempted to sell shares in the entity so the problem of placing a value on them has not arisen.
Dividends have been paid every year for the last seven years at a fixed rate per share, irrespective of profits. So far, profits have always been sufficient to cover the dividend at least one and a half times. The latest balance sheet shows that XY is financed $25 million in equity and $5 million in long term debt. $5 million new finance is likely to be required in the near future to finance expansion. Total net assets as at the last balance sheet date were $25 million.
Discuss the relationship between dividend policy, investment policy and financing policy in the context of an entity such as XY. Make a brief comparison with the large listed entity, AAA, described in part (a) of the question.
(Total for Question One = 25 marks)