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CIMAPRA19-F03-1 Exam - Topic 5 Question 51 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam
Question #: 51
Topic #: 5
[All CIMAPRA19-F03-1 Questions]

A company's current earnings before interest and taxation are $5 million.

These are expected to remain constant for the forseeable future.

The company has 10 million shares in issue which currently tradeat $3.60.

It also has a $10 million long term floating rate loan.

The current interest rate on this loan is 5%.

The company pays tax at 20%.

The company expects interest rates to increasenext yearto 6% andit's Price/Earnings (P/E) ratioto move to 9.5 times by the end of next year.

What percentagereduction in the share pricewill occurby the end of next year iftheinterest rate increaseand theP/Emovementboth occur?

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Suggested Answer: A

by Mireya at May 29, 2022, 06:41 AM

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Jennie
5 months ago
P/E ratio moving to 9.5? That's a big jump!
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Christene
5 months ago
Wait, how can they predict interest rates like that?
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Audrie
6 months ago
Not so sure about that, 5% seems more realistic.
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Felix
6 months ago
I think a 7% reduction sounds about right.
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Charisse
6 months ago
Current earnings are $5M, shares at $3.60.
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Dana
6 months ago
I think the reduction in share price could be around 5%, but I’m not completely confident in how to factor in both changes together.
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Wenona
6 months ago
I feel like I might be overthinking this. If the interest rate goes up, won't that just reduce the earnings available for shareholders?
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Cecily
6 months ago
This question seems similar to one we practiced about P/E ratios and interest rates. I think the P/E ratio drop will have a bigger effect than the interest rate increase.
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Nancey
6 months ago
I remember we discussed how interest rates affect earnings, but I'm not sure how to calculate the exact impact on share price.
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Arlette
6 months ago
This is a good question. The key is understanding that the 5S program is about creating a standardized, organized workplace. Starting in a pilot area first allows you to learn and demonstrate the process before expanding it. I'm pretty sure the answer is A, True.
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Ngoc
6 months ago
The answer has to be C, 192.168.3.6. The green policy is designed for low delay, and that's the only option that matches the green policy.
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