CIMAPRA19-F03-1 Exam - Topic 3 Question 111 Discussion

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

Question #: 111
Topic #: 3

[All CIMAPRA19-F03-1 Questions]

A company has in a 5% corporate bond in issue on which there are two loan covenants.

* Interest covermust not fall below 3 times

* Retained earnings for the yearmust not fall below $3.5 million

The Company has 200 million shares in issue.

The most recent dividend per share was $0.04.

The Company intends increasing dividends by 10% next year.

Financial projections for next year are as follows:

Advise the Board of Directors which of the following will be the status of compliance with the loan covenants next year?

AThe company will be in compliance with both covenants.

BThe company will be in breach of both covenants.

CThe company will breach the covenant in respect of retained earnings only.

DThe company will be in breach of the covenant in respect of interest cover only.

Show Suggested Answer

Suggested Answer: C

by Ngoc at Jun 15, 2025, 01:48 AM

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Luis

4 months ago

10% dividend increase seems risky with those covenants.

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Herminia

4 months ago

I think they’ll breach the retained earnings covenant.

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Isabelle

4 months ago

The interest cover is crucial for compliance.

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Gladys

4 months ago

Not sure they can manage both covenants next year.

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Hubert

4 months ago

They should be fine with both covenants, right?

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Dyan

5 months ago

I think the interest cover should be fine, but I'm a bit confused about how the dividend increase affects retained earnings.

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Mertie

5 months ago

I feel like the retained earnings might be a problem, especially with the dividend increase. But I can't recall the exact numbers we used in class.

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Doyle

5 months ago

This question seems similar to one we practiced where we had to analyze covenants. I think I need to double-check the projected earnings.

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Brandon

5 months ago

I remember we discussed how to calculate interest cover, but I'm not sure about the retained earnings part.

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Glory

6 months ago

Right, and the question gives us the dividend per share and says they're increasing it by 10%, so we can use that to estimate the earnings.

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Adolph

6 months ago

I think so. We have the bond interest rate and the number of shares, so we can figure out the total interest expense. Then we just need to project the earnings for next year.

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Caprice

6 months ago

I'm a bit confused about how to calculate the interest cover. Do we have all the information we need for that?

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Merrilee

6 months ago

Okay, let's break this down step-by-step. We need to calculate the interest cover and retained earnings, then compare them to the covenants.

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Ria

6 months ago

This question looks straightforward, but I want to make sure I understand all the details before answering.

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Laura

8 months ago

Seriously, who comes up with these exam questions? It's like they're trying to trip us up. I bet the answer is D, just to keep us on our toes.

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Gregoria

9 months ago

Ooh, I love a good financial puzzle! Let me break out my spreadsheet and crunch some numbers. This is going to be fun!

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Cordelia

7 months ago

User 3: Let's see if the company will be in compliance with the loan covenants next year.

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Erick

7 months ago

User 2: I'm ready to crunch some numbers.

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Geoffrey

8 months ago

User 1: Looks like we have a financial puzzle to solve!

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Jody

9 months ago

This question is making my head spin. Can we get a calculator up in here? I'm just going to guess and hope for the best.

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Kiera

8 months ago

I agree, the financial projections look good for next year.

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Roy

8 months ago

I think the company will be in compliance with both covenants.

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Anglea

9 months ago

I don't know, that 10% dividend increase sounds a bit too good to be true. I'm going to go with option C and say the company will breach the retained earnings covenant.

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Pansy

9 months ago

Wait, what's this about interest cover? I thought we were talking about bonds. This exam question is really testing our financial knowledge.

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Darrel

8 months ago

So, based on the financial projections provided, do you think the company will be able to meet the interest cover covenant next year?

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Trinidad

8 months ago

Yes, that's right. In this case, the company must maintain an interest cover of at least 3 times to comply with one of the loan covenants.

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Cruz

9 months ago

Interest cover is a ratio that measures a company's ability to pay interest expenses on its debt. It's important for bondholders to know if the company can meet its interest obligations.

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