Cima F3 Exam Question No 6

Question No 6:

A company has in a 5% corporate bond in issue on which there are two loan covenants.
• Interest cover must not fall below 3 times
• Retained earnings for the year must not fall below $3.5 million
The Company has 200 million shares in issue.
The most recent dividend per share was $0.04.
The Company intends increasing dividends by 10% next year.
Financial projections for next year are as follows:
Advise the Board of Directors which of the following will be the status of compliance with the loan covenants next year?

A. The company will be in compliance with both covenants.
B. The company will be in breach of both covenants.
C. The company will breach the covenant in respect of retained earnings only.
D. The company will be in breach of the covenant in respect of interest cover only.

Answer: C