CIMA Strategic level Changed F3 Questions

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Question 124

A company has a covenant on its 5% long-term bond, stipulating that its retained earnings must not fall below $2 million.

The company has 100 million shares in issue.

Its most recent dividend was $0.045 per share. It has committed to grow the dividend per share by 4% each year.

The nominal value of the bond is $60 million. It is currently trading at 80% of its nominal value.

Next year's earnings before interest and taxation are projected to be $11.25 million.

The rate of corporate tax is 20%.

If the company increases the dividend by 4%, advise the Board of Directors if the level of retained earnings will comply with the covenant?

Options:

Covenant is not breached as retained earnings = $2.40 million.

Covenant is not breached as retained earnings = $2.10 million.

Covenant is breached as retained earnings = $1.92 million.

The covenant is not breached as retained earnings = $4.68 million.

Question 125

A company wishes to raise additional debt finance and is assessing the impact this will have on key ratios.

The following data currently applies:

• Profit before interest and tax for the current year is $500,000

• Long term debt of $300,000 at a fixed interest rate of 5%

• 250,000 shares in issue with a share price of $8

The company plans to borrow an additional $200,000 on the first day of the year to invest in new project which will improve annual profit before interest and tax by $24,000.

The additional debt would carry an interest rate of 3%.

Assume the number of shares in issue remain constant but the share price will increase to $8.50 after the investment.

The rate of corporate income tax is 30%.

After the investment, which of the following statements is correct?

Options:

Interest cover will fall; P/E ratio will fall.

Interest cover will fall; P/E ratio will rise.

Interest cover will rise; P/E ratio will rise.

Interest cover will rise; P/E ratio will fall.

Question 126

The International Integrated Reporting Council (IIRC) was formed in August 2010 and brings together a cross-section of representatives from a wide variety of business sectors.

The primary purpose of the IIRC's framework is to help enable an organsation to communicate how it:

Options:

minimises the environmental impact of its business processes.

creates value in the short, medium and long term.

contributes positively to the economic well being of the environment in which it operates.

ensures that the conflicting needs of different stakeholder groups are met in an optimal manner.

Question 127

Two unlisted companies TTT and YYY are being valued. The companies have similar capital structures and risk profiles and operate in the same industry sector It is easier to value TTT than to value YYY because there have recently been several well-publicised private sales of TTT shares.

Relevant company data: