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CIMAPRA19-F02-1 Exam - Topic 3 Question 104 Discussion

W and Y are very similar entities with the same level of profit before interest and tax. However, W has gearing of 95% and Y has gearing of 30%.Which of the following statements is true?
A) Investing in W carries a higher level of risk than investing in Y. and B) A greater proportion of profit will be available out of which to declare a dividend in W. and C) Investors in Y will expect a higher return than investors in W. and D) Y has a greater commitment to meet interest payments than W.

CIMAPRA19-F02-1 Exam - Topic 3 Question 104 Discussion

Actual exam question for CIMA's CIMAPRA19-F02-1 exam
Question #: 104
Topic #: 3
[All CIMAPRA19-F02-1 Questions]

W and Y are very similar entities with the same level of profit before interest and tax. However, W has gearing of 95% and Y has gearing of 30%.

Which of the following statements is true?

Show Suggested Answer Hide Answer
Suggested Answer: A, B, C, D

by Yuriko at Dec 07, 2024, 02:32 AM

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Eleonore
9 months ago
Higher gearing usually means higher risk, so yeah, W's risky!
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Chaya
10 months ago
I doubt Y has a greater commitment to interest payments.
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Nancey
10 months ago
Wait, how can W have more profit for dividends with that gearing?
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Jennifer
10 months ago
Totally agree, W's risk profile is concerning.
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Joanna
10 months ago
W's gearing is way higher, definitely riskier.
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Adela
10 months ago
I’m confused about D; I thought W would have a lower commitment to interest payments since it has higher gearing.
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Antonio
11 months ago
I feel like I’ve seen a question like this before, and I think investors in Y would expect a higher return due to lower risk. So maybe C is the answer?
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Dawne
11 months ago
I’m not sure, but I think W might have more profit available for dividends because of its gearing. Could it be B?
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Lavonda
11 months ago
I remember studying that higher gearing usually means higher risk, so I think A might be correct.
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France
11 months ago
Tricky question. I'll need to think through the impact of gearing on risk, dividends, and expected returns. Let me work through this step-by-step.
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Jesusita
11 months ago
I've got this! The higher gearing of W means a greater proportion of its profits will go towards interest payments, leaving less available for dividends. So B is the correct answer.
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Mariann
11 months ago
I'm a bit confused by this one. I know gearing is related to debt levels, but I'm not sure how that translates to the statements given. I'll need to review my notes on this topic.
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Carma
11 months ago
Okay, I think I know the answer here. The higher gearing of W means it has a higher level of debt, so investing in W would carry more risk than Y.
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Dwight
11 months ago
Hmm, this question is testing my understanding of gearing and risk. I'll need to think carefully about the implications of the different gearing levels.
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Jess
1 year ago
I'm just gonna go with A) and hope the examiner has a good sense of humor. After all, 95% gearing? That's like playing financial Russian roulette!
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Tammi
1 year ago
Let's hope the examiner appreciates our humor.
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Ricki
1 year ago
Yeah, 95% gearing does sound risky.
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Vicki
1 year ago
I think A) is the safest bet here.
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Kara
1 year ago
B) A greater proportion of profit will be available out of which to declare a dividend in W. Hmm, I don't think so. The high gearing in W means more of the profits will go towards servicing the debt, leaving less for dividends.
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Micheal
1 year ago
D) Y has a greater commitment to meet interest payments than W. Haha, nice try, but no. The high gearing of 95% in W actually means it has a greater commitment to meet interest payments, not Y.
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Alana
1 year ago
C) Investors in Y will expect a higher return than investors in W. This makes sense, as Y has lower gearing and hence lower risk, so investors would expect a lower return.
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Blythe
1 year ago
D) Y has a greater commitment to meet interest payments than W.
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Gerald
1 year ago
B) A greater proportion of profit will be available out of which to declare a dividend in W.
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Rashad
1 year ago
A) Investing in W carries a higher level of risk than investing in Y.
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Julio
1 year ago
A) Investing in W carries a higher level of risk than investing in Y. This is clearly the correct answer. The high gearing of 95% in W means it has a much higher debt burden, making it a riskier investment.
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Nieves
1 year ago
User 3: D) Y has a greater commitment to meet interest payments than W.
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Nguyet
1 year ago
User 2: B) A greater proportion of profit will be available out of which to declare a dividend in W.
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Glory
1 year ago
User 1: A) Investing in W carries a higher level of risk than investing in Y.
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Coral
1 year ago
I think investors in Y will expect a higher return than investors in W.
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Cathrine
1 year ago
I disagree, I believe a greater proportion of profit will be available out of which to declare a dividend in W.
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Kathrine
1 year ago
I think investing in W carries a higher level of risk than investing in Y.
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