CIMA Exam CIMAPRA19-F03-1 Topic 6 Question 67 Discussion

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

Question #: 67
Topic #: 6

A companyplans to raise finance for a new project.

Itis considering either the issue of a redeemable cumulative preference share or a Eurobond.

Advise the directors which of the following statements would justify the issue of preference shares over a bond?

APreference shares are not secured against the assets of the business -however, the Eurobond would be.

BIf profits are poor, dividends do not have to be paid on the preference share - however, interest would need to be paid on the Eurobond.

CThe issue of the preference share would reduce the company's gearing - however, the Eurobond would increase it.

DThe company can claim tax relief on the dividend paid on the preference share at a higher rate than the interest paid on the Eurobond.

Show Suggested Answer

Suggested Answer: A, B, E

by Kate at Apr 02, 2023, 10:43 PM

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4 days ago

Option B is the clear winner here. No one wants to pay interest when profits are poor, so the preference shares are the way to go.

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4 days ago

I see your points, but I think option C is the most beneficial as it would reduce our company's gearing.

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9 days ago

I disagree, I believe option B is better as we won't have to pay dividends if profits are poor.

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13 days ago

I think option D is the best choice because tax relief on dividends can save us money.

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