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CIMAPRA19-F03-1 Exam - Topic 7 Question 56 Discussion

A company has a covenant on its 5% long term corporate bond.* Covenant - The earnings must not fall below $7 millionThe bond has a nominal value of $60 million.It is currently trading at 80% of its nominal value.The projected earnings before interest and taxation for next year are $11.5 million.The company retains 80% of its earnings. It pays tax at 20%.Advise the Board of Directors which of the following covenant conditions will apply next year?
C) The earnings will be = $6.80 million (The covenant will be breached).
A) The earnings will be = $7.28 million (The covenant will not be breached).
B) The earnings will be = $11.50 million (The covenant will not be breached).
D) The earnings will be = $5.44 million (The covenant will be breached).

CIMAPRA19-F03-1 Exam - Topic 7 Question 56 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam
Question #: 56
Topic #: 7
[All CIMAPRA19-F03-1 Questions]

A company has a covenant on its 5% long term corporate bond.

* Covenant - The earnings must not fall below $7 million

The bond has a nominal value of $60 million.

It is currently trading at 80% of its nominal value.

The projected earnings before interest and taxation for next year are $11.5 million.

The company retains 80% of its earnings. It pays tax at 20%.

Advise the Board of Directors which of the following covenant conditions will apply next year?

Show Suggested Answer Hide Answer
Suggested Answer: C

by Leonora at Aug 21, 2022, 11:02 AM

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Mila
8 months ago
Just to clarify, they need to maintain above $7 million, right?
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Nelida
9 months ago
I think A is a bit misleading, earnings will be higher than that.
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Buck
9 months ago
Wait, how can they go from $11.5 million to $6.8 million? Sounds off.
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Hana
9 months ago
Definitely going with option B!
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Cora
9 months ago
The projected earnings are $11.5 million, so the covenant won't be breached.
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Milly
9 months ago
I'm a bit confused about the tax impact; I thought we had to deduct taxes before checking the covenant, but I'm not sure how that plays into the options.
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Iluminada
9 months ago
I practiced a similar question where we had to determine if earnings met a covenant, and I think option B makes the most sense here.
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Marilynn
9 months ago
I think the projected earnings are $11.5 million, so the covenant should be fine, but I can't recall if we need to consider anything else.
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Denna
10 months ago
I remember we discussed how to calculate retained earnings after tax, but I'm not entirely sure how that affects the covenant.
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Ozell
10 months ago
I'm leaning towards the Cloud event integration role. It seems like it would be designed specifically for handling cloud-related events and alerts.
upvoted 0 times
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Rosamond
10 months ago
I'm not sure about this one. I'll have to review my notes on data set types to figure out the answer.
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Val
10 months ago
I'm a bit confused by the different graphics mode options. Can someone help me understand the differences between "Build to Lossless" and "Always Lossless"? I want to make sure I pick the right one for this scenario.
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