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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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Ashley
13 days 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
16 days 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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Yesenia
25 days 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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Blossom
14 days ago
I agree, C seems like the most likely answer with that 25% increase in earnings.
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Brice
2 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
12 days ago
Yes, it might not cancel out the earnings increase completely, but it could still affect the overall wealth.
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Marjory
19 days ago
I think the reduction in P/E ratio will have an impact on shareholder wealth.
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Alethea
2 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
2 months ago
I disagree, I believe the shareholder wealth will increase by $3.2 million.
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Adolph
2 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
2 months ago
I think the shareholder wealth will increase by $4 million.
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