CIMA Exam CIMAPRA19-F03-1 Topic 5 Question 82 Discussion

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

Question #: 82
Topic #: 5

[All CIMAPRA19-F03-1 Questions]

A company is planning a new share issue.

The funds raised will be used to repay debt on which it is currently paying a high interest rate.

Operating profit and dividends are expected to remain unchanged in the near future.

If the share issue is implemented, which THREE of the following are most likely to increase?

AThe cost of equity

BThe number of shares in issue

CNext year's payment of corporate income tax

DThe gearing (book value of debt as a percentage of the book value of equity + debt)

EInterest cover

Show Suggested Answer

Suggested Answer: B, C, D

by Sylvia at Mar 16, 2024, 07:10 PM

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Jesus

1 years ago

I also think the gearing will increase since they are repaying high interest debt.

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Aimee

1 years ago

Yes, because issuing more shares can signal a lower confidence in the company's performance.

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Rosalind

1 years ago

But wouldn't the cost of equity increase too if they issue more shares?

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Jesus

1 years ago

I agree, that would dilute the ownership of existing shareholders.

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Aimee

1 years ago

I think if they issue more shares, the number of shares in issue will increase.

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Rosalind

1 years ago

I'm nervous about this question on the share issue.

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Leana

1 years ago

You're right, Earleen. And interest cover would likely improve as well, since they are paying off high-interest debt.

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Earleen

1 years ago

I believe the gearing would decrease as they plan to repay debt with the funds raised.

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Benton

1 years ago

Yes, that makes sense. The cost of equity would also likely increase with the new share issue.

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Rolf

1 years ago

I think the number of shares in issue would increase if they are planning a new share issue.

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