CIMA F3 Exam With Confidence Using Practice Dumps

Company issues new shares and uses proceeds to repay high-interest debt.

Effects:

Cost of equity (A): financial risk falls as gearing falls → cost of equity is more likely to decrease, not increase.

Number of shares (B): new share issue → increases.

Corporate tax payment (C): interest expense falls, taxable profit rises → tax paid increases.

Gearing (D): debt falls and equity rises → gearing decreases, not increases.

Interest cover (E): operating profit unchanged, interest lower → interest cover increases.

Answer: B, C and E

A: Net position is pay floating (fixed to bank, receive fixed in swap, pay floating) → True.

B: No principal is exchanged in an interest rate swap → False.

C: LIBOR, not LIBID, is normally the reference rate → False.

D: Interest cash flows are exchanged periodically (e.g. annually) → True.

E: Swaps are usually between a company and a bank → True.

Answer: A, D, E

Negatives for the bank:

A. Advanced, custom-made tech equipment – poor resale value and high obsolescence risk, weak security.

C. Premises on a long-term lease and not fully fitted out – limited asset security; further capital outlay still needed.

E. Essential ongoing R&D – continuing cash demands and uncertainty of returns.

Positives, so not negatives:

B. Continuing profitability and net cash generation – good for servicing debt.

D. Founders’ personal investment – shows commitment and loss-sharing; strengthens equity base.