Page 317 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Answers

Next year:

No project:

Next year's profit is forecast to stay at GBP 10 million if the project is not
undertaken, so EPS will be GBP 10m/10m = GBP 1.

DPS is expected to stay at 30% of this, so will be GBP 0.30.

With project:

Next year's profit is forecast to grow by 15% (to GBP 11.5 million) if the project
is undertaken, so EPS will be GBP 11.5m/10m = GBP 1.15.

We are told that the dividend cut is expected to be for only one year, so DPS
next year will revert to 30% of EPS, i.e. 30% × GBP 1.15 = GBP 0.345.

Example 6

Which of the following financial ratios is likely to be of LEAST interest to
a lender when assessing the creditworthiness of a borrower?

A Interest cover

B Gearing

C Operating profit margin

D EBITDA to finance charges ratio

Solution

The answer is (C).

Lenders are particularly interested in the level of gearing (B) and the ability of
the borrower to meet its interest commitments ((A) and (D)).

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