A company's gearing is well below its optimal level and therefore it is considering implementing a share re-purchase...

The company’s gearing is below its optimal level, so it plans to increase debt by issuing long-term bonds and using the proceeds to repurchase shares. CIMA F3 teaches that altering capital structure affects risk, cost of capital, and shareholder metrics.

A. Weighted Average Cost of Capital – Decreases (✔)

Since the company is moving toward its optimal gearing level, replacing equity with cheaper debt finance initially reduces WACC due to the tax shield on interest. This is a core Modigliani–Miller (with tax) implication emphasised in F3.

B. Cost of equity – Increases (✘)

Higher gearing increases financial risk to equity holders, so the cost of equity rises, not falls.

C. Interest cover – Decreases (✔)

Interest expense rises due to the new bond issue while earnings remain unchanged. This reduces interest cover, a key credit-risk indicator in F3.

D. Dividend per share – Increases (✘)

The same total dividend is paid but fewer shares remain after the buy-back, so dividend per share increases.

E. Gearing (book value) – Decreases (✔)

This is a common exam trap. Equity is reduced sharply due to the buy-back, and debt rises. However, because equity is reduced faster than debt rises, the denominator (debt + equity) falls, reducing the ratio based on book values as defined in the question.

F. Number of shares – Decreases (✘)

Shares do fall, but the question asks which measures decrease most likely; F3 focuses on financial metrics rather than mechanical outcomes.