Cima F2 Exam Question No 24

Question No 24:

What is Debt finance?

This is the loan of funds to a business without conferring ownership rights. The key features of debt financing arising from this 'arm's length relationship' are:

• Interest is paid out of pre-tax profits as an expense of the business.
• It carries a risk of default if interest and principal payments are not met.

Cima F2 Exam Question No 23

Question No 23:

Defined contribution plans?

The pension payable on retirement depends on the contributions paid into the plan by the employee and the employer.

• The employer's contribution is usually a fixed percentage of the employee's salary. The employer has no further obligation after this amount is paid.
• Therefore, the annual cost to the employer is reasonably predictable.
• Defined contribution plans present few accounting problems.

Cima F2 Exam Question No 22

Question No 22:

What is 'Ex rights'?

On the first day of dealings in the newly issued shares, the rights no longer exist and the old shares are now traded 'ex rights' (without rights attached).

Cima F2 Exam Question No 21

Question No 21:

What is 'Cum rights'?

When a rights issue is announced, all existing shareholders have the right to subscribe for new shares, and so there are rights ('cum rights') attached to the shares, and the shares are traded 'cum rights'

Cima F2 Exam Question No 20

Question No 20:

What is Market price after issue?

• After the announcement of a rights issue there is a tendency for share prices to fall.
• The temporary fall is due to uncertainty about:
• Consequences of the issue
• Future profits
• Future dividends.
• After the actual issue the market price will normally fall again because:
• There are more shares in issue (adverse affect on earnings per share), and
• New shares were issued at market price discount.