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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3 days ago

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

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