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Question - Leverage and capital structure - hinanifaf - 07-31-2010
The due date is 2 August 2010, if any one who can explain this,i will appreciate it very much.
P Co wishes to raise 1mil in external finances by issuing either ordinary shares or 14% preference shares or 12% unsecured loan. These funds are expected to generate additional operating profits of R328 000. Ordinary shares are to be issued at a discount of 10% & current dividend will be maintained. Issue cost may be ignored.
Current financial statements
R
Turnover 4 532 000
Operating Profit 1 117 000
Interest (228 000)
EBT 889 000
Income tax 35% (311 150)
Earnings available 577 850
Dividends (346 700)
Retained Earnings 231 150
Balance Sheet R
Assets
Non-current assets 2 426 000
Current assets 2 813 000
Total Assets 5 239 000
Equity and Liabilities
Ordinary shares 50c 500 000
Share premium 496 000
Other reserves 1 206 000
2 202 000
Long term debt
13% Debentures 1 200 000
Current Liabilities 1 837 000
Total equity & liabil 5 239 000
Current liabilities includes a bank overdraft of R600 000.
The current share price is R3.5.
1. What is the current earnings per share?
2. Calculate the current gearing(debt to equity ratio, and debt
includes both debentures and bank overdraft)
3. Calculate the EPS and gearing for each financing alternative.
4. Advice the management, which of the three financing sources the company should use.