CIMA F3 Exam With Confidence Using Practice Dumps

This question examines loan covenant compliance, a topic covered in CIMA F3 under Debt Finance, Financial Risk, and Dividend Policy. Loan covenants are contractual restrictions imposed by lenders to protect their interests. Breaching a covenant can trigger penalties or loan repayment demands, so directors must assess compliance carefully using projected financial information.

The company has two covenants:

Interest cover must not fall below 4 times

Retained earnings for the year must not fall below $5.00 million

Step 1: Interest Cover Covenant

CIMA F3 defines interest cover as:

From the projections:

EBIT = $25.00 million

Interest = $3.20 million

Since 7.8 > 4, the company meets the interest cover covenant.

Step 2: Retained Earnings Covenant

Earnings after tax are projected at $15.26 million.

The most recent dividend per share is $0.10, and dividends are planned to increase by 8%:

With 100 million shares in issue:

Retained earnings for the year:

Since $4.46 million < $5.00 million, the company breaches the retained earnings covenant.

Conclusion (CIMA F3 Interpretation)

Interest cover covenant: Complied with

Retained earnings covenant: Breached

Under CIMA F3 guidance, directors must recognise that even when profitability appears strong, dividend policy can cause covenant breaches if distributions are excessive.

Answer: A. $129.6

Working

Current share price = $5.60

Growth for 3 years at 5% p.a.:

P3=5.60×1.053=5.60×1.157625=6.4827≈$6.48P_3 = 5.60 \times 1.05^3 = 5.60 \times 1.157625 = 6.4827 \approx \$6.48P3​=5.60×1.053=5.60×1.157625=6.4827≈$6.48

Conversion terms = 20 shares per $100 bond

Conversion value in 3 years:

Conversion value=20×6.4827=129.654≈$129.6\text{Conversion value} = 20 \times 6.4827 = 129.654 \approx \$129.6Conversion value=20×6.4827=129.654≈$129.6

So the expected conversion value per $100 bond is $129.6.