CIMA F3 common mistakes
CIMA F3 · Understand the traps and how to avoid them.
Calculating a WACC by weighting the book values of debt and equity taken straight from the statement of financial position, then using that rate to discount a project's cash flows.
Candidates default to numbers that are easy to find and are comfortable with the accounting equation, forgetting that WACC must reflect market values and target capital structure, not historical carrying amounts.
What to do instead
Before computing weights, write down the market value of equity (share price x shares outstanding) and the market value of debt (present value of future interest and principal, or quoted price x nominal). Use target or market weights, and state explicitly in your workings which weights you used and why.
Using the dividend growth model to estimate the cost of equity without checking whether the growth rate is sustainable or whether the current dividend is the just-paid (D0) rather than next-year (D1) figure.
Exam questions often give a dividend 'just paid' and a growth rate; candidates plug the just-paid dividend directly into the numerator, understating Ke, or accept a growth rate above the long-run nominal GDP growth rate without comment.
What to do instead
Always write D0 x (1+g) as the numerator and label it D1. Sanity-check g against long-run inflation plus real growth (typically low single digits); if the stated g is implausible, use an alternative such as CAPM or a sustainable growth rate (b x ROE) and explain the switch.
Producing an NPV that ignores the treatment of inflation, mixing nominal cash flows with a real discount rate (or vice versa), and omitting tax and working capital effects.
Candidates focus on the mechanics of discounting and forget the consistency rule; working capital and tax are seen as 'extra' rather than integral to incremental cash flow.
What to do instead
Adopt a fixed proforma: operating cash flow, less tax on operating profit, less capital expenditure, less the increase in working capital. Match nominal cash flows to a nominal (money) discount rate, or real flows to a real rate, and state the choice. Recover working capital at the end of the project.
Treating sunk costs as relevant, or ignoring opportunity costs and cannibalisation when evaluating a new project.
Candidates see any cash outflow mentioned in the scenario as part of the investment, and overlook the revenue lost on existing products or the rental income forgone on a site already owned.
What to do instead
Apply the incremental principle explicitly: include only cash flows that change because of the decision. Exclude past research or feasibility spend; include the market value of an owned asset used (opportunity cost) and deduct lost contribution from cannibalised sales.
Choosing between mutually exclusive projects of different lives by comparing raw NPVs, or ranking by IRR when projects differ in scale or timing.
Candidates learn NPV as the 'best' rule and apply it mechanically, forgetting that a longer project has more time to accumulate value and that IRR is a percentage, not a measure of absolute wealth.
What to do instead
For different lives, use equivalent annual annuity (NPV divided by the annuity factor for the project life) or a replacement-chain approach. For scale differences, use NPV or profitability index, not IRR. For non-conventional cash flows with multiple IRRs, defer to NPV and mention MIRR.
Describing a sensitivity or scenario analysis in general terms ('the project is risky') rather than quantifying the change in a variable that drives NPV to zero.
Candidates are uncomfortable with the arithmetic and revert to qualitative commentary, which earns no application marks in a scenario-based question.
What to do instead
Compute sensitivity as NPV divided by the present value of the affected cash flow stream, expressed as a percentage change in that variable. For each key variable (selling price, volume, discount rate, project life), state the break-even change and rank variables by sensitivity.
Valuing a target company using a single method and presenting the resulting number as definitive, without cross-checking against an asset-based or market-multiple valuation.
Candidates learn the dividend valuation model and the free cash flow model as separate topics and treat them as alternatives rather than triangulation tools; time pressure discourages a second method.
What to do instead
Always produce at least two valuations: an income-based one (DVM or free cash flow to firm discounted at WACC) and a market-based one (P/E or EV/EBITDA multiple of a comparable). Reconcile the range, explain the divergence, and present a valuation range rather than a point estimate.
In an acquisition question, adding the standalone values of acquirer and target to get the post-acquisition value, ignoring synergy and the premium paid.
Candidates conflate the combined entity value with the sum of parts and forget that the premium transfers value from acquirer shareholders to target shareholders.
What to do instead
Use: value of combined entity = VA + VT + synergy; gain to acquirer = synergy - premium; cost to acquirer = premium. Check whether the acquisition creates or destroys value for the acquirer's shareholders by comparing synergy with the premium, and show the effect on the acquirer's share price.
Recommending a financing instrument or capital structure change without linking it to the company's gearing, interest cover, dividend policy and debt covenants.
Candidates treat financing decisions as isolated textbook choices (debt is cheaper because of the tax shield) and do not test the recommendation against the company's actual financial position and stated strategy.
What to do instead
Before recommending, compute the pro-forma gearing ratio, interest cover and any covenant headroom under the proposed financing. Compare with sector norms and the company's stated target, and discuss trade-off theory (tax shield versus financial distress costs) and pecking order implications.
Writing a discursive answer to a numerical question, or vice versa, without allocating time and marks according to the requirement verbs and the marks available.
Candidates misread the requirement (for example, 'discuss' versus 'calculate and comment') and spend too long on one section, leaving the discussion or recommendation section unfinished.
What to do instead
Before writing, underline the requirement verb and the marks per part, and budget roughly one minute per mark. For 'calculate and comment' questions, do the calculation first and keep a clear audit trail, then write the comment with a recommendation that follows directly from your numbers.