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CIMA Exam CIMAPRA19-F03-1 Topic 3 Question 89 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam
Question #: 89
Topic #: 3
[All CIMAPRA19-F03-1 Questions]

A company has stable earnings of S2 million and its shares are currently trading on a price earnings multiple {PIE) of 10 times. It has10 million shares in issue.

The company is raising S4 million debt finance to fund an expansion of its existing business which is forecast to increase annual earnings straight away by 25% and then remain at that level for the foreseeable future. The corporation tax rate is 20%. It is expected that the P/E will reduce to 8 times over the next year.

What is the most likely change in shareholder wealth resulting from this plan?

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Suggested Answer: A, B, D

by Edmond at Jun 22, 2024, 03:56 PM

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Brice
13 hours ago
Wait, does the reduction in P/E ratio cancel out the earnings increase? I'm not sure, this is tricky. Maybe option D is the safest choice.
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Alethea
5 days ago
I agree with Candida, the shareholder wealth will increase by $4 million because of the expansion and increase in earnings.
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Loren
6 days ago
I disagree, I believe the shareholder wealth will increase by $3.2 million.
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Adolph
6 days ago
Hmm, this seems straightforward. The increased earnings should boost the share price, resulting in greater shareholder wealth. I'm leaning towards option B.
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Candida
17 days ago
I think the shareholder wealth will increase by $4 million.
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