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CIMAPRA19-F03-1 Exam - Topic 5 Question 104 Discussion

Awholly equity financedcompany has the following objectives:1. Increase inprofit before interest and tax by at least 10% per year.2. Maintain a dividend payoutratio of40% of earningsper year.Relevant data:* There are 2 million shares in issue.* Profit before interest and tax in the last financial year was$5million.* The corporateincometax rateis30%.At the beginning of the current financial year, the company raised long term debt of $2 million at 10% interesteachyear.Calculate the dividend per share that will be announced this year assuming the company achieves its objective of increasing profit before interest and tax by 10%.
A) $0.74 and C) $1.11
B) $0.67
D) $1.01

CIMAPRA19-F03-1 Exam - Topic 5 Question 104 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam
Question #: 104
Topic #: 5
[All CIMAPRA19-F03-1 Questions]

Awholly equity financedcompany has the following objectives:

1. Increase inprofit before interest and tax by at least 10% per year.

2. Maintain a dividend payoutratio of40% of earningsper year.

Relevant data:

* There are 2 million shares in issue.

* Profit before interest and tax in the last financial year was$5million.

* The corporateincometax rateis30%.

At the beginning of the current financial year, the company raised long term debt of $2 million at 10% interesteachyear.

Calculate the dividend per share that will be announced this year assuming the company achieves its objective of increasing profit before interest and tax by 10%.

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Suggested Answer: A, C

by Whitney at Jan 15, 2025, 05:40 PM

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Ciara
9 months ago
Is the tax rate really going to affect the dividends that much?
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Gwenn
10 months ago
I calculated it, and I think it’s $1.01 per share!
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Elly
10 months ago
Wait, how can they maintain a 40% payout with new debt?
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Vernice
10 months ago
Totally agree, that 10% increase is doable!
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Joaquin
10 months ago
The profit before interest and tax will be $5.5 million this year.
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Fairy
10 months ago
I’m pretty sure we need to calculate the profit after tax first, then apply the 40% payout ratio. I just hope I remember the right steps!
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Francine
11 months ago
I feel like the dividend payout ratio is straightforward, but I’m confused about how to factor in the interest expense from the new debt. Did we cover that in class?
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Quiana
11 months ago
I think if the profit before interest and tax increases by 10%, we need to calculate the new profit and then apply the tax rate. That sounds familiar from our last mock exam.
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Buddy
11 months ago
I remember we practiced calculating profit before tax and dividends, but I'm a bit unsure about how the interest from the debt affects the final profit.
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Lorrine
11 months ago
I think I've got it! The key is to use the 10% increase in profit before interest and tax, then factor in the interest expense and tax to get the final net profit. From there, the 40% dividend payout ratio will give me the total dividends, which I can divide by the number of shares.
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Ashley
11 months ago
I'm a bit confused by the dividend payout ratio requirement. Do I need to calculate the total dividends first, then divide by the number of shares? Or is there a more direct way to get the dividend per share?
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Yvonne
11 months ago
Okay, let me see if I can break this down step-by-step. First, I need to calculate the new profit before interest and tax, then factor in the interest expense and tax to get the net profit. From there, I can determine the dividend per share.
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Chun
11 months ago
This looks like a straightforward calculation problem, but I'll need to carefully work through the given information to make sure I don't miss anything.
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Jennifer
1 year ago
Alright, time to put on my calculator hat and crunch some numbers. 10% increase in profit, 40% dividend payout ratio... Aha! Option A, $0.74 per share, is the winner. Time to collect my prize and buy myself a nice, shiny new protractor.
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Noble
1 year ago
Great job on figuring out the dividend per share, option A it is!
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Lindsey
1 year ago
I agree, the calculations point to option A as the dividend per share.
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King
1 year ago
I think you're right, option A seems to be the correct answer.
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Bettina
1 year ago
Hold up, did they say 'wholly equity financed' and then introduce long-term debt? Someone's playing a little fast and loose with the facts here. But hey, I'll go with option B, $0.67 per share, just to keep things interesting.
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Martha
1 year ago
I think option B, $0.67 per share, is a good choice. Let's see if that's the correct answer.
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Jimmie
1 year ago
I agree, it does seem a bit contradictory to be 'wholly equity financed' and then introduce long-term debt.
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Dana
1 year ago
I'm not sure about the answer. Can someone explain how the dividend per share is calculated in this scenario?
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Marilynn
1 year ago
Okay, let's break this down. 2 million shares, $5 million profit before interest and tax, 30% corporate income tax, and $2 million in long-term debt at 10% interest. Yup, I think I've got it. Option D, $1.01 per share, is the way to go.
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Sheridan
1 year ago
Yes, option D seems to be the correct choice based on the calculations.
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Odette
1 year ago
So, we're all in agreement then? Option D it is.
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Glenn
1 year ago
That makes sense, considering the data provided.
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Dominque
1 year ago
I think it's option D, $1.01 per share.
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Catarina
1 year ago
Hmm, let's see. Increase in profit before interest and tax by 10%, and maintain a dividend payout ratio of 40%. Sounds like a pretty solid plan to me. I'm leaning towards option C, $1.11 per share.
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Emilio
1 year ago
I agree with Arleen. With a 10% increase in profit, the dividend per share should also increase.
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Arleen
1 year ago
I think the answer is C) $1.11 because the company aims to increase profit by 10%.
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