A company has a financial objective of maintaining a gearing ratio of between 30% and...

CIMA F3 Question Answer

A company has a financial objective of maintaining a gearing ratio of between 30% and 40%, where gearing is defined as debt/equity at market values.

The company has been affected by a recent economic downturn leading to a shortage of liquidity and a fall in the share price during 20X1.

On 31 December 20X1 the company was funded by:

• Share capital of 4 million $1 shares trading at $4.0 per share.

• Debt of $7 million floating rate borrowings.

The directors plan to raise $2 million additional borrowings in order to improve liquidity.

They expect this to reassure investors about the company's liquidity position and result in a rise in the share price to $4.2 per share.

Is the planned increase in borrowings expected to help the company meet its gearing objective?

No, gearing would increase but the gearing objective would be met both before and after the announcement.

No, gearing would increase and the gearing objective would be exceeded both before and after the announcement.

No, gearing would increase and the gearing objective would be met before the announcement but exceeded after the announcement.

Yes, gearing would fall and the gearing objective would be exceeded before the announcement but met after the announcement.

CIMA F3 Summary

Price: $52.5 ~~$149.99~~