CIMA Exam CIMAPRA19-F03-1 Topic 3 Question 33 Discussion

A company wishes to raise additionaldebtfinance and isassessingthe impact thiswill have on key ratios.

The following data currently applies:

* Profit before interest and tax for the current yearis $500,000

* Long term debt of $300,000 at a fixed interest rate of 5%

* 250,000 sharesin issuewith a share price of $8

The companyplansto borrow an additional $200,000 on the first day of the yearto invest in new project whichwillimprove annualprofit before interest and tax by $24,000.

The additionaldebtwould carry an interest rate of 3%.

Assume the number of shares in issue remain constant but theshare price will increase to $8.50 after the investment.

Therate of corporate income tax is 30%.

After the investment, which of the following statements is correct?