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CIMA Exam CIMAPRA19-F03-1 Topic 5 Question 51 Discussion
Actual exam question for
CIMA's
CIMAPRA19-F03-1 exam
Question #: 51
Topic #: 5
[All CIMAPRA19-F03-1 Questions]
Topic #: 5
A company's current earnings before interest and taxation are $5 million.
These are expected to remain constant for the forseeable future.
The company has 10 million shares in issue which currently tradeat $3.60.
It also has a $10 million long term floating rate loan.
The current interest rate on this loan is 5%.
The company pays tax at 20%.
The company expects interest rates to increasenext yearto 6% andit's Price/Earnings (P/E) ratioto move to 9.5 times by the end of next year.
What percentagereduction in the share pricewill occurby the end of next year iftheinterest rate increaseand theP/Emovementboth occur?
Suggested Answer:
A
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