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CIMAPRA19-F03-1 Exam - Topic 7 Question 18 Discussion

A company hasacovenanton its 5% long-term bond, stipulating thatits retained earnings must not fall below $2 million.The company has 100 million shares in issue.Its most recent dividend was $0.045 per share. It has committed to grow the dividend per share by 4% each year.The nominal value of the bond is $60 million. Itis currently trading at 80% of its nominal value.Next year's earnings before interest and taxation are projected to be $11.25 million.The rate of corporate tax is 20%.If the company increases the dividend by 4%, advise the Board of Directorsif the level of retained earnings will comply with the covenant?
C) Covenant is breached as retained earnings = $1.92 million.
A) Covenant is not breached as retained earnings = $2.40 million.
B) Covenant is not breached as retained earnings = $2.10 million.
D) The covenant is not breached as retained earnings = $4.68 million.

CIMAPRA19-F03-1 Exam - Topic 7 Question 18 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam
Question #: 18
Topic #: 7
[All CIMAPRA19-F03-1 Questions]

A company hasacovenanton its 5% long-term bond, stipulating thatits retained earnings must not fall below $2 million.

The company has 100 million shares in issue.

Its most recent dividend was $0.045 per share. It has committed to grow the dividend per share by 4% each year.

The nominal value of the bond is $60 million. Itis currently trading at 80% of its nominal value.

Next year's earnings before interest and taxation are projected to be $11.25 million.

The rate of corporate tax is 20%.

If the company increases the dividend by 4%, advise the Board of Directorsif the level of retained earnings will comply with the covenant?

Show Suggested Answer Hide Answer
Suggested Answer: C

by Blondell at May 06, 2022, 04:30 PM

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Carmela
10 months ago
I’m not so sure about that calculation.
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Ronnie
10 months ago
Definitely not breached if retained earnings are $4.68 million!
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Dominque
11 months ago
Wait, how can retained earnings be $4.68 million? That seems high!
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Corrinne
11 months ago
I think the retained earnings will be fine with a 4% growth.
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Avery
11 months ago
The bond is trading at 80% of its nominal value.
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Bernardo
11 months ago
I'm a bit confused by the question. The connection table data doesn't seem to directly point to the solution. I'll need to carefully read through the details and try to connect the dots.
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Celestina
11 months ago
I thought it might be "C" for Interior, but now I'm questioning that since Interior doesn't really encompass the whole operation.
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King
11 months ago
Based on my understanding of collective bargaining, I believe rights arbitration is a formal hearing between the union and management to resolve disputes over the interpretation or application of an existing contract. So option C seems like the most accurate description.
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