CIMA F3 Exam With Confidence Using Practice Dumps

A. The issue of bonds might limit the availability of debt finance in the future.

If the project is financed by a bond, gearing rises to 2:5, increasing financial risk and using up debt capacity. A rights issue instead reduces gearing to 1:5, preserving future borrowing capacity.

C. The rights issue will lead to less pressure on the operating cash flows of the programme.

Bond finance requires fixed interest payments (and eventual redemption), which must be met regardless of project cash flow variability. Equity raised via a rights issue has no mandatory interest and dividends are discretionary, so it places less strain on operating cash flows.

So the answer is:

Answer: A and C

We’re looking for long-term changes that would improve a company’s credit rating (i.e. reduce perceived credit risk and increase capacity to service debt):

A. Increase in interest cover (EBIT / interest) → higher coverage, safer for lenders → positive.

B. Decrease in (Net debt)/(EBITDA) → lower leverage relative to earnings → positive.

C. Increase in free cash flow from operations → more internally generated cash to pay interest and repay debt → positive.

D. Decrease in (Book debt)/(Book equity) is also a good sign in reality, but the question restricts us to three; exam focus is usually on coverage and cash flow-based ratios, so A, B and C are the best three.

E. Decrease in dividend cover (earnings / dividend) means paying a larger proportion of earnings out as dividends → less retained profit and weaker protection for creditors → negative for credit rating.

So the three most likely to improve the rating: A, B, C.

 Revenues are in E$ and F$, costs are in G$, and reporting currency is D$.

 If the D$ strengthens against G$ (option C), then G$ costs translate into fewer D$, so reported costs fall and operating profit margin improves.

 A stronger D$ against E$ or F$ (A or B) reduces the D$ value of sales, hurting margins.

 A weaker D$ against G$ (D) makes G$-denominated costs more expensive in D$, also hurting margins.

So the change that most helps maintain/improve margin is C.