Page 179 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Financing – Capital structure

Solution

The answer is (A).

Both covenant terms will still be met after the finance is raised.

Before the finance is raised:

Gearing = 60,000/(60,000 + (100,000 × $1.40)) = 30%

Interest cover = 15,000/(10% × 60,000) = 2.5

After the finance is raised:

Gearing = (60,000 + 20,000)/(60,000 + 20,000 + (100,000 × $1.35)) = 37%

Interest cover = 15,000/[(10% × 60,000) + (6% × 20,000)] = 2.1

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