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| Section | Weight | Objectives |
|---|---|---|
| Topic 1: Sources of long-term funds | 25% | - Financing and dividend decisions
|
| Topic 2: Business valuation | 40% | - Corporate finance and valuation
|
| Topic 3: Financial policy decisions | 15% | - Formulation of financial strategy
|
| Topic 4: Financial risks | 20% | - Managing financial risks
|
>> CIMAPRA19-F03-1 Practice Questions <<
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NEW QUESTION # 222
A company plans to cut its dividend but is concerned that the share price will fall. This demonstrates the_____________
Answer:
Explanation:
effect
Signalling effect (information content of dividends)In CIMA F3, dividend policy is closely linked to information asymmetry between a company's management and its shareholders.
Managers typically have better information about the firm's future prospects than external investors. As a result, investors often interpret changes in dividends as signals about management's expectations of future earnings and cash flows.
The concern that cutting dividends will cause the share price to fall illustrates the signalling effect (also known as dividend signalling theory). According to this theory, a dividend cut is interpreted by the market as a negative signal, suggesting that management expects lower future profits or cash flow difficulties. Investors react by revising their expectations downward, leading to a fall in the share price.CIMA F3 study guidance contrasts this with Modigliani and Miller's dividend irrelevance theory, which assumes perfect markets and no information asymmetry. In reality, markets are imperfect, and dividends convey information. Therefore, companies are often reluctant to reduce dividends even when it may be financially prudent, due to fear of adverse market reactions.This behaviour is also linked to dividend stability, another key concept in F3, where firms prefer stable or gradually increasing dividends to avoid sending negative signals to investors.
NEW QUESTION # 223
A company has 8% convertible bonds in issue. The bonds are convertible in 3 years time at a ratio of 20 ordinary shares per $100 nominal value bond.
Each share:
* has a current market value of $5.60
* is expected to grow at 5% each year
What is the expected conversion value of each $100 nominal value bond in 3 years' time?
Answer: A
Explanation:
Working
Current share price = $5.60
Growth for 3 years at 5% p.a.:
P3=5.60×1.053=5.60×1.157625=6.4827#$6.48P_3 = 5.60 \times 1.05
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