CIMA Exam CIMAPRA19-F03-1 Topic 3 Question 89 Discussion

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

Question #: 89
Topic #: 3

A company has stable earnings of S2 million and its shares are currently trading on a price earnings multiple {PIE) of 10 times. It has10 million shares in issue.

The company is raising S4 million debt finance to fund an expansion of its existing business which is forecast to increase annual earnings straight away by 25% and then remain at that level for the foreseeable future. The corporation tax rate is 20%. It is expected that the P/E will reduce to 8 times over the next year.

What is the most likely change in shareholder wealth resulting from this plan?

AShareholder wealth will increase by $4 million.

BShareholder wealth will increase by $3.2 million.

CShareholder wealth will increase by $5 million

DNo change in shareholder wealth.

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Suggested Answer: A, B, D

by Edmond at Jun 22, 2024, 03:56 PM

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25 days ago

I think the shareholder wealth will increase by $4 million.

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