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CIMAPRA19-F03-1 Exam - Topic 3 Question 78 Discussion

A company is considering the issue of a convertible bond compared to a straight bond issue (non-convertible bond).Director A is concerned that issuing a convertible bond will upset the shareholders for the following reasons:* it will dilutetheir control* the interest payments will be higher therefore reducing liquidity* it will increase the gearing ratio therefore increasing financial riskDirector B disagrees, and is preparing a board paper to promote theissue of the convertible bondrather thana non-convertible.Advise the Director Bwhich THREE of the following statements should be included in his board paper to promote theissue of the convertible bond?
A) The convertible bond may not dilute control as the bond holder has an option to choose conversion. and B) The coupon rate on the convertible bond will be lower than that on a non-convertible bond. and D) Issuing a convertible bond will have a more favourable impact on the gearing ratio than a non-convertible bond.
C) When converted into shares, the company will receive a cash inflow which can be used for future investments.
E) Over the life of the bond, a convertible will be more expensive than a non-convertible.

CIMAPRA19-F03-1 Exam - Topic 3 Question 78 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam
Question #: 78
Topic #: 3
[All CIMAPRA19-F03-1 Questions]

A company is considering the issue of a convertible bond compared to a straight bond issue (non-convertible bond).

Director A is concerned that issuing a convertible bond will upset the shareholders for the following reasons:

* it will dilutetheir control

* the interest payments will be higher therefore reducing liquidity

* it will increase the gearing ratio therefore increasing financial risk

Director B disagrees, and is preparing a board paper to promote theissue of the convertible bondrather thana non-convertible.

Advise the Director Bwhich THREE of the following statements should be included in his board paper to promote theissue of the convertible bond?

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

by Benton at Dec 23, 2023, 08:55 AM

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Justine
9 months ago
Higher interest payments? That sounds risky!
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Trina
10 months ago
Cash inflow from conversions is a solid point!
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Tayna
10 months ago
Wait, how can a convertible bond be cheaper in the long run?
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Justine
10 months ago
I don't think it will dilute control that much.
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Fairy
10 months ago
The coupon rate on convertible bonds is usually lower!
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Tiera
10 months ago
I feel like the gearing ratio point is tricky; I thought convertible bonds might actually increase financial risk, but maybe there's a way to frame it positively?
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Eun
11 months ago
I practiced a similar question where the cash inflow from converted shares was highlighted as a benefit for future investments. That could be a good argument for Director B.
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Evangelina
11 months ago
I'm not entirely sure, but I think the concern about dilution might be overstated since bondholders can choose whether to convert or not.
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Vincenza
11 months ago
I remember discussing how convertible bonds can actually have a lower coupon rate compared to straight bonds, which might be a strong point for Director B.
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Nakisha
11 months ago
This is a great opportunity to demonstrate my understanding of corporate finance. I'll craft a concise but compelling argument to persuade Director B on the merits of the convertible bond.
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Paris
11 months ago
I'm a bit confused by the details here. I'll need to review the differences between convertible and straight bonds more closely to make sure I understand the implications before answering.
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Josephine
11 months ago
I think I've got a good handle on this. The convertible bond can actually be advantageous if structured properly. I'll highlight the flexibility it provides and how it can benefit the company.
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Tequila
11 months ago
Okay, let's see. The key points seem to be around dilution, liquidity, and financial risk. I'll need to focus on addressing those concerns in my response.
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Ceola
11 months ago
This seems like a tricky question. I'll need to carefully weigh the pros and cons of the convertible bond versus the straight bond to determine the best arguments for Director B.
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Hayley
11 months ago
Hmm, I'm a bit confused about the whole private Google Access and routing back to the on-premises data center. I'll need to re-read the question a few times to make sure I understand all the details before attempting to answer.
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Chantell
11 months ago
I remember practicing a similar question where we had to choose between the called party transform mask and the external phone number mask. I think one of those might be correct here.
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Maryann
11 months ago
This seems like a straightforward question. I think the answer is C - case, since the question specifically mentions tracking customer issues until they are resolved.
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Wava
1 year ago
Haha, I bet Director A is just worried the convertible bond will 'convert' all his power to the shareholders. But hey, if it means more cash for the company, who cares about a little lost control, right? I'd definitely go with C - free money is always a winner in my book!
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Chaya
1 year ago
Shenika: User Comment: Definitely, option C is a no-brainer - free money for future investments!
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Shenika
1 year ago
User 2: User Comment: I agree, as long as it brings in more cash for the company, it's worth it.
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Melodie
1 year ago
User 1: Director A is just being paranoid about losing control.
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Iesha
1 year ago
User 2: User Comment: Yeah, Director B should definitely highlight in the board paper that converting the bond into shares will bring in cash for future investments.
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Cyndy
1 year ago
User 1: Director A needs to chill out, it's not like the convertible bond will take away all their control.
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Lauran
1 year ago
That's a good point. Statement A addresses the concern about control dilution, statement C highlights the cash inflow from conversion, and statement D shows the favorable impact on the gearing ratio.
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Sherly
1 year ago
I disagree. Director B should include statement A, C, and D in the board paper to promote the issue of the convertible bond.
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Margart
1 year ago
I'd go with A, C, and D. The convertible bond gives shareholders the option to convert, which helps mitigate the dilution issue. And the cash inflow and gearing impact are definitely positives. Honestly, I'm just glad I don't have to make this decision - it's a tough call!
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Lauran
1 year ago
I think Director A has valid concerns about issuing a convertible bond.
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Becky
1 year ago
B and C look like strong points to include in the board paper. The lower coupon rate and cash inflow could really help sway the discussion. As for D, I'm not convinced that's a selling point - increasing gearing is still risky.
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Ardella
1 year ago
D: A: That's a valid concern, but maybe we can address the potential benefits of a more favorable impact on the gearing ratio in the board paper.
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Gussie
1 year ago
C: D: I'm not convinced that increasing the gearing ratio is a good idea though. It could increase financial risk.
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Barney
1 year ago
B: I agree, those are definitely strong selling points for the convertible bond.
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Shenika
1 year ago
A: I think B and C are great points to include in the board paper. The lower coupon rate and cash inflow could really help sway the discussion.
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Blossom
1 year ago
I agree with Director B. The convertible bond may not dilute control as the bond holder has an option to choose conversion.
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Fausto
1 year ago
The convertible bond option seems to have some benefits, like the cash inflow from conversion and the potentially lower coupon rate. But Director A raises valid concerns about dilution and financial risk - those need to be carefully considered.
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Lucina
1 year ago
I disagree, I believe Director B is right in promoting the convertible bond.
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Michell
1 year ago
I think Director A has valid concerns about issuing a convertible bond.
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