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CIMA Exam CIMAPRA19-F03-1 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?

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Suggested Answer: A, B, D

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

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Wava
1 days 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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Lauran
2 days 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
4 days 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
5 days 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
8 days ago
I think Director A has valid concerns about issuing a convertible bond.
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Becky
8 days 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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Blossom
10 days 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
10 days 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
12 days ago
I disagree, I believe Director B is right in promoting the convertible bond.
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Michell
17 days ago
I think Director A has valid concerns about issuing a convertible bond.
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