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

5 months ago

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

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Aimee

5 months ago

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

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Rosalind

5 months ago

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

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Jesus

6 months ago

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

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Aimee

6 months ago

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

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Rosalind

6 months ago

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

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Leana

6 months 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

6 months ago

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

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Benton

6 months ago

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

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Rolf

6 months ago

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

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