CIMA Exam CIMAPRA19-F03-1 Topic 7 Question 18 Discussion

A company hasacovenanton its 5% long-term bond, stipulating thatits retained earnings must not fall below $2 million.

The company has 100 million shares in issue.

Its most recent dividend was $0.045 per share. It has committed to grow the dividend per share by 4% each year.

The nominal value of the bond is $60 million. Itis currently trading at 80% of its nominal value.

Next year's earnings before interest and taxation are projected to be $11.25 million.

The rate of corporate tax is 20%.

If the company increases the dividend by 4%, advise the Board of Directorsif the level of retained earnings will comply with the covenant?