Question Tag: Debt-to-Equity Ratio

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  • 20 Marks

IA – OCT 2022 – L1 – Q5 – Accounting Ratios

Compute specified accounting ratios for 2020 and 2021 using the provided financial statements of AGN Company Limited.

  • Using the financial information below, compute the following accounting ratios for the years 2020 and 2021
    a. Net Profit/(Loss) Margin
    b. Asset Turnover
    c. Return on Capital Employed
    d. Debt to Equity Ratio
    e. Receivable Collection Period
    (Total: 20 marks)

AGN COMPANY LIMITED
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31st DECEMBER 2021

2021 GH¢ 2020 GH¢
Sales 5,945,975 2,466,948
Cost of Sales (5,690,168) (2,222,661)
Gross Profit 255,807 244,287
Other Income 187,858 –
Administration Expenses (840,942) (743,454)
Distribution Expenses (35,418) –
Profit/(Loss) Before Interest & Tax (432,695) (499,167)
Finance Cost (165,932) –
Net Profit/(Loss)Before Tax (598,627) (499,167)
Taxation – –
Profit/(Loss) After Taxation (598,627) (499,167)

RETAINED EARNINGS ACCOUNT FOR THE YEAR ENDED DECEMBER 31, 2021

2021 GH¢ 2020 GH¢
1st January (499,167) –
Net Profit/(Loss) for the Year (598,627) (499,167)
31st December (1,097,794) (499,167)

AGN COMPANY LIMITED
STATEMENT OF FINANCIAL POSITION AS AT 31ST DECEMBER 2021

2021 GH¢ 2020 GH¢
NON CURRENT ASSETS
Property, Plant and Equipment 376,237 136,600
Total Non Current Assets 376,237 136,600
CURRENT ASSETS
Inventories 2,413,383 1,920,452
Trade Receivables 489,162 310,682
Taxation 17,223 8,970
Cash and Cash Equivalent 797,585 293,406
Total Current Assets 3,717,353 2,533,510
TOTAL ASSETS 4,093,590 2,670,110
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts Payable 3,792,030 1,570,073
Total Liabilities 3,792,030 1,570,073
SHAREHOLDERS’ EQUITY
Stated Capital 1,399,354 1,399,354
Director’s Account – 199,850
Retained Earnings (1,097,794) (499,167)
Total Shareholders’ Equity 301,560 1,100,037
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 4,093,590 2,670,110

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  • 25 Marks

STP – Feb 2021 – L2 – Q1 – Strategic Tax Planning

Advise on tax implications of AIG acquiring 55% stake in Fluid Logistics Ghana and providing a GH₵6.5M loan, plus tax planning options.

The President of America Is Great (AIG) Group, a US Corporation, is exploring the possibility of acquiring a fifty-five percent stake in Fluid Logistics Ghana Limited. The stated capital of Fluid Logistics Ghana Limited is GH₵1,500,000. AIG Corporation intends providing a loan of GH₵6,500,000 to Fluid Logistics Ghana Limited when the transaction for the acquisition of the fifty-five percent stake is completed. The President of AIG Corporation is seeking your advice on the tax implications of the proposed transactions.

Required: Advise the President on: i. The income tax implications of the acquisition of a fifty-five percent stake in Fluid Logistics Ghana Limited. 9 marks ii. The income tax implications of providing the loan of GH₵6,500,000. 9 marks iii. The tax planning options available to minimize the tax effects of the proposed transactions.

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  • 8 Marks

AFM – May 2017 – L3 – Q2b – Sources of finance and cost of capital

Calculate the cost of capital for Oheneba Limited with two different capital structures.

Oheneba Limited is considering the acquisition of a concession in the Brong Ahafo region to enable it to start a quarry business. The average industry beta is 1.6 with an equity-to-debt ratio of 2:1.

The following information was extracted from the books of Oheneba Limited:

Income Statement

You are also informed that the long-term debt of the company is considered risk-free with a gross redemption yield of 10% and the beta coefficient of the company’s equity is 1.2, while the average return on the stock market is 15%.

Required:
i) Determine the cost of capital to apply for the appraisal of the quarry if Oheneba Limited will maintain its capital structure after the implementation of the quarry project. (5 marks)
ii) Determine the cost of capital to apply if the company will change its capital structure to 20% debt and 80% equity. (3 marks)

 

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  • 12 Marks

AFM – May 2019 – L3 – Q4b – Dividend policy in multinationals and capital structure decisions

Evaluate the financing options for Asana Ltd’s expansion, calculate the value of a right, dividend capacity, and debt-to-equity ratio under different methods.

Asana Ltd (Asana) is a manufacturing company based in Ghana. It is listed on Ghana’s stock exchange with a total market capitalization of GH¢400 million and 50 million shares outstanding. Its debt stock is made up of 10,000 18% bonds with a face value of GH¢100 each. Per the bond indenture, Asana is required to maintain a maximum debt-to-equity ratio of 80% and is prohibited from paying a dividend in any year unless its dividend capacity for that year is at least 45% of net income for that year. For the past three years, the company has not been able to pay dividends to its shareholders because it has not been able to meet the minimum dividend capacity requirement.

Presently, the company is planning an expansion project that could enhance its dividend capacity for the coming years. The expansion project is expected to increase profit before interest and tax by 15% above the recent figure of GH¢35 million. The directors are considering whether to use equity or debt finance to raise the GH¢50 million required by the expansion project. The amount required for the business expansion will be invested in additional property and equipment. Details of the two financing methods under consideration follow:

Method 1: Equity Finance
If equity finance is used, Asana will offer 1 new share for every 4 existing shares in a rights offer at a discount of 10% off the current market price.

Method 2: Debt Finance
If debt finance is used, Asana will raise the required GH¢50 million through a syndicated loan arrangement. The interest rate on this syndicated loan is expected to be 20%. It is assumed that the entire principal will be drawn immediately and paid back in a lump sum in 5 years’ time.

Additional information:

  1. Presently, the book value of equity is GH¢200 million, while the debt level is GH¢100 million.
  2. The recent profit before interest and tax is reported after charging depreciation of GH¢10 million and profit on disposal of non-current assets of GH¢2 million. The aggregate cost of the non-current assets sold is GH¢10 million, and their aggregate accumulated depreciation is GH¢8 million.
  3. In addition to the business expansion expenditure, GH¢2 million will be invested to maintain existing productive capacity in the coming year. This will be financed from retained earnings.
  4. Additional investment in net working capital will be 20% of the current net working capital balance of GH¢100 million.
  5. Asana pays corporate income tax at 22%.

Required:

i) Supposing equity finance is used, compute the value of a right.
(2 marks)

ii) Forecast the dividend capacity of Asana under both financing methods after the business expansion. Conclude whether Asana would be able to pay dividends to its shareholders in the coming year.
(5 marks)

iii) Compute the revised debt-to-equity ratio of Asana under both financing methods after the business expansion.
(3 marks)

iv) Use the results of the calculations above to evaluate whether equity or debt finance should be used for the planned business expansion.
(2 marks)

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  • 20 Marks

IA – OCT 2022 – L1 – Q5 – Accounting Ratios

Compute specified accounting ratios for 2020 and 2021 using the provided financial statements of AGN Company Limited.

  • Using the financial information below, compute the following accounting ratios for the years 2020 and 2021
    a. Net Profit/(Loss) Margin
    b. Asset Turnover
    c. Return on Capital Employed
    d. Debt to Equity Ratio
    e. Receivable Collection Period
    (Total: 20 marks)

AGN COMPANY LIMITED
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31st DECEMBER 2021

2021 GH¢ 2020 GH¢
Sales 5,945,975 2,466,948
Cost of Sales (5,690,168) (2,222,661)
Gross Profit 255,807 244,287
Other Income 187,858 –
Administration Expenses (840,942) (743,454)
Distribution Expenses (35,418) –
Profit/(Loss) Before Interest & Tax (432,695) (499,167)
Finance Cost (165,932) –
Net Profit/(Loss)Before Tax (598,627) (499,167)
Taxation – –
Profit/(Loss) After Taxation (598,627) (499,167)

RETAINED EARNINGS ACCOUNT FOR THE YEAR ENDED DECEMBER 31, 2021

2021 GH¢ 2020 GH¢
1st January (499,167) –
Net Profit/(Loss) for the Year (598,627) (499,167)
31st December (1,097,794) (499,167)

AGN COMPANY LIMITED
STATEMENT OF FINANCIAL POSITION AS AT 31ST DECEMBER 2021

2021 GH¢ 2020 GH¢
NON CURRENT ASSETS
Property, Plant and Equipment 376,237 136,600
Total Non Current Assets 376,237 136,600
CURRENT ASSETS
Inventories 2,413,383 1,920,452
Trade Receivables 489,162 310,682
Taxation 17,223 8,970
Cash and Cash Equivalent 797,585 293,406
Total Current Assets 3,717,353 2,533,510
TOTAL ASSETS 4,093,590 2,670,110
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts Payable 3,792,030 1,570,073
Total Liabilities 3,792,030 1,570,073
SHAREHOLDERS’ EQUITY
Stated Capital 1,399,354 1,399,354
Director’s Account – 199,850
Retained Earnings (1,097,794) (499,167)
Total Shareholders’ Equity 301,560 1,100,037
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 4,093,590 2,670,110

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  • 25 Marks

STP – Feb 2021 – L2 – Q1 – Strategic Tax Planning

Advise on tax implications of AIG acquiring 55% stake in Fluid Logistics Ghana and providing a GH₵6.5M loan, plus tax planning options.

The President of America Is Great (AIG) Group, a US Corporation, is exploring the possibility of acquiring a fifty-five percent stake in Fluid Logistics Ghana Limited. The stated capital of Fluid Logistics Ghana Limited is GH₵1,500,000. AIG Corporation intends providing a loan of GH₵6,500,000 to Fluid Logistics Ghana Limited when the transaction for the acquisition of the fifty-five percent stake is completed. The President of AIG Corporation is seeking your advice on the tax implications of the proposed transactions.

Required: Advise the President on: i. The income tax implications of the acquisition of a fifty-five percent stake in Fluid Logistics Ghana Limited. 9 marks ii. The income tax implications of providing the loan of GH₵6,500,000. 9 marks iii. The tax planning options available to minimize the tax effects of the proposed transactions.

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  • 8 Marks

AFM – May 2017 – L3 – Q2b – Sources of finance and cost of capital

Calculate the cost of capital for Oheneba Limited with two different capital structures.

Oheneba Limited is considering the acquisition of a concession in the Brong Ahafo region to enable it to start a quarry business. The average industry beta is 1.6 with an equity-to-debt ratio of 2:1.

The following information was extracted from the books of Oheneba Limited:

Income Statement

You are also informed that the long-term debt of the company is considered risk-free with a gross redemption yield of 10% and the beta coefficient of the company’s equity is 1.2, while the average return on the stock market is 15%.

Required:
i) Determine the cost of capital to apply for the appraisal of the quarry if Oheneba Limited will maintain its capital structure after the implementation of the quarry project. (5 marks)
ii) Determine the cost of capital to apply if the company will change its capital structure to 20% debt and 80% equity. (3 marks)

 

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  • 12 Marks

AFM – May 2019 – L3 – Q4b – Dividend policy in multinationals and capital structure decisions

Evaluate the financing options for Asana Ltd’s expansion, calculate the value of a right, dividend capacity, and debt-to-equity ratio under different methods.

Asana Ltd (Asana) is a manufacturing company based in Ghana. It is listed on Ghana’s stock exchange with a total market capitalization of GH¢400 million and 50 million shares outstanding. Its debt stock is made up of 10,000 18% bonds with a face value of GH¢100 each. Per the bond indenture, Asana is required to maintain a maximum debt-to-equity ratio of 80% and is prohibited from paying a dividend in any year unless its dividend capacity for that year is at least 45% of net income for that year. For the past three years, the company has not been able to pay dividends to its shareholders because it has not been able to meet the minimum dividend capacity requirement.

Presently, the company is planning an expansion project that could enhance its dividend capacity for the coming years. The expansion project is expected to increase profit before interest and tax by 15% above the recent figure of GH¢35 million. The directors are considering whether to use equity or debt finance to raise the GH¢50 million required by the expansion project. The amount required for the business expansion will be invested in additional property and equipment. Details of the two financing methods under consideration follow:

Method 1: Equity Finance
If equity finance is used, Asana will offer 1 new share for every 4 existing shares in a rights offer at a discount of 10% off the current market price.

Method 2: Debt Finance
If debt finance is used, Asana will raise the required GH¢50 million through a syndicated loan arrangement. The interest rate on this syndicated loan is expected to be 20%. It is assumed that the entire principal will be drawn immediately and paid back in a lump sum in 5 years’ time.

Additional information:

  1. Presently, the book value of equity is GH¢200 million, while the debt level is GH¢100 million.
  2. The recent profit before interest and tax is reported after charging depreciation of GH¢10 million and profit on disposal of non-current assets of GH¢2 million. The aggregate cost of the non-current assets sold is GH¢10 million, and their aggregate accumulated depreciation is GH¢8 million.
  3. In addition to the business expansion expenditure, GH¢2 million will be invested to maintain existing productive capacity in the coming year. This will be financed from retained earnings.
  4. Additional investment in net working capital will be 20% of the current net working capital balance of GH¢100 million.
  5. Asana pays corporate income tax at 22%.

Required:

i) Supposing equity finance is used, compute the value of a right.
(2 marks)

ii) Forecast the dividend capacity of Asana under both financing methods after the business expansion. Conclude whether Asana would be able to pay dividends to its shareholders in the coming year.
(5 marks)

iii) Compute the revised debt-to-equity ratio of Asana under both financing methods after the business expansion.
(3 marks)

iv) Use the results of the calculations above to evaluate whether equity or debt finance should be used for the planned business expansion.
(2 marks)

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