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

2 months 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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Chaya

27 days ago

Shenika: User Comment: Definitely, option C is a no-brainer - free money for future investments!

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Shenika

28 days ago

User 2: User Comment: I agree, as long as it brings in more cash for the company, it's worth it.

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Melodie

1 months ago

User 1: Director A is just being paranoid about losing control.

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Iesha

1 months ago

User 2: User Comment: Yeah, Director B should definitely highlight in the board paper that converting the bond into shares will bring in cash for future investments.

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Cyndy

1 months ago

User 1: Director A needs to chill out, it's not like the convertible bond will take away all their control.

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Lauran

2 months 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

2 months 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

2 months 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

2 months ago

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

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Becky

2 months 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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Ardella

1 months ago

D: A: That's a valid concern, but maybe we can address the potential benefits of a more favorable impact on the gearing ratio in the board paper.

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Gussie

1 months ago

C: D: I'm not convinced that increasing the gearing ratio is a good idea though. It could increase financial risk.

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Barney

2 months ago

B: I agree, those are definitely strong selling points for the convertible bond.

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Shenika

2 months ago

A: I think B and C are great points to include in the board paper. The lower coupon rate and cash inflow could really help sway the discussion.

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Blossom

2 months 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

2 months 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

3 months ago

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

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Michell

3 months ago

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

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