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CIMAPRA19-F03-1 Exam - Topic 3 Question 127 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?
A) Reduction of 7%
B) Reduction of 5%
C) Reduction of 1%
D) Reduction of 0%

CIMAPRA19-F03-1 Exam - Topic 3 Question 127 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam
Question #: 127
Topic #: 3
[All CIMAPRA19-F03-1 Questions]

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?

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Suggested Answer: A

by Hyman at Jun 22, 2026, 02:31 PM

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Truman
I think I saw something similar where the share price didn't change much with a small interest rate increase, so maybe the reduction is minimal?
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Carli
5 days ago
I feel like the P/E ratio drop will offset some of the interest rate increase, but I can't recall the exact calculations we did in class.
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Gail
10 days ago
This reminds me of a practice question where we had to adjust share prices based on earnings and interest rates. I think the reduction could be significant.
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Oneida
15 days ago
I remember calculating the impact of interest rates on earnings, but I'm not sure how to factor in the P/E ratio change.
upvoted 0 times
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