CIMA Exam CIMAPRA19-F03-1 Topic 5 Question 51 Discussion

A company's current earnings before interest and taxation are $5 million.

These are expected to remain constant for the forseeable future.

The company has 10 million shares in issue which currently tradeat $3.60.

It also has a $10 million long term floating rate loan.

The current interest rate on this loan is 5%.

The company pays tax at 20%.

The company expects interest rates to increasenext yearto 6% andit's Price/Earnings (P/E) ratioto move to 9.5 times by the end of next year.

What percentagereduction in the share pricewill occurby the end of next year iftheinterest rate increaseand theP/Emovementboth occur?