CIMA Exam CIMAPRA19-F03-1 Topic 3 Question 78 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam

Question #: 78
Topic #: 3

A company is considering the issue of a convertible bond compared to a straight bond issue (non-convertible bond).

Director A is concerned that issuing a convertible bond will upset the shareholders for the following reasons:

* it will dilutetheir control

* the interest payments will be higher therefore reducing liquidity

* it will increase the gearing ratio therefore increasing financial risk

Director B disagrees, and is preparing a board paper to promote theissue of the convertible bondrather thana non-convertible.

Advise the Director Bwhich THREE of the following statements should be included in his board paper to promote theissue of the convertible bond?

AThe convertible bond may not dilute control as the bond holder has an option to choose conversion.

BThe coupon rate on the convertible bond will be lower than that on a non-convertible bond.

CWhen converted into shares, the company will receive a cash inflow which can be used for future investments.

DIssuing a convertible bond will have a more favourable impact on the gearing ratio than a non-convertible bond.

EOver the life of the bond, a convertible will be more expensive than a non-convertible.

Show Suggested Answer

Suggested Answer: A, B, D

by Benton at Dec 23, 2023, 08:55 AM

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Wava

9 days ago

Haha, I bet Director A is just worried the convertible bond will 'convert' all his power to the shareholders. But hey, if it means more cash for the company, who cares about a little lost control, right? I'd definitely go with C - free money is always a winner in my book!

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Lauran

10 days ago

That's a good point. Statement A addresses the concern about control dilution, statement C highlights the cash inflow from conversion, and statement D shows the favorable impact on the gearing ratio.

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Sherly

13 days ago

I disagree. Director B should include statement A, C, and D in the board paper to promote the issue of the convertible bond.

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Margart

13 days ago

I'd go with A, C, and D. The convertible bond gives shareholders the option to convert, which helps mitigate the dilution issue. And the cash inflow and gearing impact are definitely positives. Honestly, I'm just glad I don't have to make this decision - it's a tough call!

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Lauran

17 days ago

I think Director A has valid concerns about issuing a convertible bond.

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Becky

17 days ago

B and C look like strong points to include in the board paper. The lower coupon rate and cash inflow could really help sway the discussion. As for D, I'm not convinced that's a selling point - increasing gearing is still risky.

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Blossom

18 days ago

I agree with Director B. The convertible bond may not dilute control as the bond holder has an option to choose conversion.

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Fausto

19 days ago

The convertible bond option seems to have some benefits, like the cash inflow from conversion and the potentially lower coupon rate. But Director A raises valid concerns about dilution and financial risk - those need to be carefully considered.

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Lucina

20 days ago

I disagree, I believe Director B is right in promoting the convertible bond.

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Michell

25 days ago

I think Director A has valid concerns about issuing a convertible bond.

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