At the last financial year end, 31 December 20X1, a company reported: The corporate income...

Vendor: CIMA
Product: F3
Update on: Dec 27, 2025
Questions: 393

CIMA F3 Question Answer

At the last financial year end, 31 December 20X1, a company reported:

The corporate income tax rate is 30% and the bank borrowings are subject to an interest cover covenant of 4 times.

The results are presently comfortably within the interest cover covenant as they show interest cover of 8.3 times. The company plans to invest in a new product line which is not expected to affect profit in the first year but will require additional borrowings of $20 million at an annual interest rate of 10%.

What is the likely impact on the existing interest cover covenant?

Interest cover would reduce to 3 times and the covenant would be breached.

Interest cover would reduce to 3 times and the covenant would NOT be breached.

Interest cover would reduce to 5 times and the covenant would be breached.

Interest cover would reduce to 5 times and the covenant would NOT be breached.