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

Actual exam question for CIMA's CIMAPRA19-F03-1 exam

Question #: 89
Topic #: 3

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?

AShareholder wealth will increase by $4 million.

BShareholder wealth will increase by $3.2 million.

CShareholder wealth will increase by $5 million

DNo change in shareholder wealth.

Show Suggested Answer

Suggested Answer: A, B, D

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

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Delmy

3 months ago

No change in shareholder wealth seems unlikely to me.

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Lai

3 months ago

The P/E dropping to 8 is a big factor here.

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Alaine

3 months ago

Wait, how does debt finance boost wealth? Sounds risky.

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Billy

4 months ago

I think it might actually be $4 million.

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Bobbye

4 months ago

Shareholder wealth will increase by $3.2 million.

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Aliza

4 months ago

I think the increase in earnings is straightforward, but I’m confused about how the tax rate and new P/E will ultimately affect the final answer.

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Sue

4 months ago

I feel like the P/E reduction will play a big role here, but I'm uncertain how to factor that into the overall change in shareholder wealth.

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Brittni

4 months ago

This question seems similar to one we practiced about debt financing and its impact on earnings. I think I need to calculate the new earnings first to see how it plays out.

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Elsa

5 months ago

I remember we discussed how to calculate the new earnings after the expansion, but I'm not sure how the P/E ratio affects shareholder wealth in this case.

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Gianna

5 months ago

This seems straightforward enough. The key is understanding how the debt financing, earnings increase, and P/E ratio change will all impact the share price and ultimately shareholder wealth. I think I've got a good handle on this.

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Nan

5 months ago

Alright, I've got a strategy here. First, I'll calculate the new earnings after the 25% increase. Then I'll apply the new P/E ratio to get the new share price. From there, I can determine the change in shareholder wealth.

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Cheryl

5 months ago

I'm a bit confused by the P/E ratio changes. How exactly does that factor into the shareholder wealth calculation? I'll need to review my notes on that.

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Kassandra

5 months ago

Okay, let's see. The company is raising debt to fund an expansion, which will increase earnings by 25%. But the P/E ratio is expected to drop. I think I need to do some calculations to determine the net effect.

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Santos

5 months ago

Hmm, this looks like a tricky one. I'll need to carefully work through the details to figure out the impact on shareholder wealth.

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Dyan

5 months ago

Hmm, I'm a bit confused on this one. I thought it might be the Develop stage, but I'm not totally certain. I'll have to review the IBM Garage Method stages again.

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Tamra

5 months ago

This seems pretty straightforward. I'll just need to navigate to the right page, select the appropriate options, and enter the required information. As long as I pay close attention to the details, I should be able to complete this task without any issues.

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Jamal

5 months ago

I remember a similar example where they talked about message integrity and signatures. I think this situation relates to that, emphasizing how important it is to verify.

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Ashley

9 months ago

Hmm, I wonder if the company will use the new debt to invest in a time machine and go back to when P/E ratios were higher. That would really boost shareholder wealth!

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Monroe

9 months ago

I bet the exam writers are just trying to trick us with all these numbers. I'm going with D - no change in shareholder wealth. That's the most boring but probably correct answer.

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Fletcher

8 months ago

I guess we'll just have to wait and see what the correct answer is.

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Martin

8 months ago

That's true, but the decrease in P/E ratio might offset that potential increase.

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Dino

8 months ago

But what if the increase in earnings actually leads to an increase in shareholder wealth?

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Emile

8 months ago

I think you might be right, D does seem like the safest option.

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Yesenia

10 months ago

Aha! The question is asking for the 'most likely' change, so I think C is the best answer. Gotta love those 25% earnings boosts!

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Alease

9 months ago

True, but overall it still seems like a positive move for shareholder wealth with that earnings boost.

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Sabrina

9 months ago

But don't forget about the decrease in P/E ratio to 8 times next year, that might affect shareholder wealth.

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Blossom

9 months ago

I agree, C seems like the most likely answer with that 25% increase in earnings.

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Brice

10 months 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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Nadine

9 months ago

Yes, it might not cancel out the earnings increase completely, but it could still affect the overall wealth.

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Marjory

9 months ago

I think the reduction in P/E ratio will have an impact on shareholder wealth.

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Alethea

10 months 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

11 months ago

I disagree, I believe the shareholder wealth will increase by $3.2 million.

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Adolph

11 months 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

11 months ago

I think the shareholder wealth will increase by $4 million.

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