Exam CIMAPRA19-F03-1 Topic 6 Question 229 Discussion
Actual exam question for CIMA's CIMAPRA19-F03-1 exam
Question #: 229
Topic #: 6
Question #: 229
Topic #: 6
A company has forecast the following results for the next financial year:
The following is also relevant:
* Profit after tax for the year can be assumed to be equivalent to free cash flow for the year.
* Debt finance comprises a $10 million floating rate loan which currently carries an interest rate of 5%.
* $400,000 investment in non-current assets is required to achieve required growth, all of which is to financed from next year's free cash flow.
* The company plans to pay a dividend of $150,000 next year, financed from next year's free cash flow.
The company is concerned that interest rates could rise next year to 6% which could then affect their investment plans.
If interest rates were to rise to 6% and the company wishes to maintain its dividend amount, the planned investment expenditure will decrease by:
The following is also relevant:
* Profit after tax for the year can be assumed to be equivalent to free cash flow for the year.
* Debt finance comprises a $10 million floating rate loan which currently carries an interest rate of 5%.
* $400,000 investment in non-current assets is required to achieve required growth, all of which is to financed from next year's free cash flow.
* The company plans to pay a dividend of $150,000 next year, financed from next year's free cash flow.
The company is concerned that interest rates could rise next year to 6% which could then affect their investment plans.
If interest rates were to rise to 6% and the company wishes to maintain its dividend amount, the planned investment expenditure will decrease by:
Suggested Answer: A Vote an answer
Forecast P&L ('000):
Operating profit = 1,300
Interest at 5% on $10m = 500
Profit before tax = 800
Tax (25%) = 200
Profit after tax = 600
Profit after tax # free cash flow (FCF).
Planned uses of next year's FCF at current rates:
Investment in non-current assets = 400
Dividend = 150
Total = 550, leaving 50 spare from FCF 600.
If interest rises to 6%:
New interest = 10m × 6% = 600
New PBT = 1,300 # 600 = 700
Tax = 25% of 700 = 175
New PAT (FCF) = 700 # 175 = 525
Available for investment after paying the same dividend 150:
525#150=375525 - 150 = 375525#150=375
Original planned investment = 400 # now only 375 possible.
Reduction in planned investment = 400 # 375 = 25.
Operating profit = 1,300
Interest at 5% on $10m = 500
Profit before tax = 800
Tax (25%) = 200
Profit after tax = 600
Profit after tax # free cash flow (FCF).
Planned uses of next year's FCF at current rates:
Investment in non-current assets = 400
Dividend = 150
Total = 550, leaving 50 spare from FCF 600.
If interest rises to 6%:
New interest = 10m × 6% = 600
New PBT = 1,300 # 600 = 700
Tax = 25% of 700 = 175
New PAT (FCF) = 700 # 175 = 525
Available for investment after paying the same dividend 150:
525#150=375525 - 150 = 375525#150=375
Original planned investment = 400 # now only 375 possible.
Reduction in planned investment = 400 # 375 = 25.
by Dinah at Sep 11, 2026, 06:19 AM
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