Question Tag: Loan Covenants

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  • 20 Marks

CR – Nov 2014 – L3 – SB – Q3 – Presentation of Financial Statements (IAS 1)

Analyze Prochain Plc’s financial performance and calculate key ratios for loan covenants.

Prochain Plc

The Directors of Prochain Plc have pursued an aggressive policy of expansion in the last two years. They have developed several new products and market share has increased.

The financial statements for the year ended 31 December 2013, which will be presented to the Board of Directors at its next meeting, are being finalised. The financial statements at the year-end are presented below:

Statement of profit or loss and other comprehensive income for the year ended 31 December

The results of the company as well as certain key ratios that will form part of the covenants in respect of the loan facilities will be discussed at the Board of Directors meeting.

Notes:

  1. The movement on the revaluation reserve relates to property, plant, and equipment revalued in the year.
  2. The movement on other reserves relates to the gains on the investments available for sale.
  3. The bonds are repayable on 1 July 2015.

Required:

(a) Based on the results of Prochain Plc for the year ended 31 December 2013, calculate the key ratios for the loan.
(8 Marks)

(b) Prepare a report commenting on the financial performance for the year in relation to the key ratios for the loan.
(12 Marks)

(Total 20 Marks)

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  • 20 Marks

BMF – Nov 2020 – L1 – SB – Q6 – Basics of Business Finance and Financial Markets

Explanation of loan covenants, reasons and benefits for share repurchase, and features of a finance lease arrangement.

(a) For many loan agreements, the borrower is required to provide undertakings or guarantees of some kind.
Distinguish between covenants and guarantees. (5 Marks)

(b) State THREE reasons why a company will repurchase its shares and THREE benefits that will accrue to the company for doing so. (6 Marks)

(c) Companies can acquire assets with finance lease instead of buying assets with equity or debt capital.
State SIX main features of a finance lease arrangement. (9 Marks)

(Total 20 Marks)

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  • 20 Marks

CR – Nov 2023 – L3 – Q5 – Analysis and interpretation of financial statements

Analyze and compare the financial performance and position of two companies, Abodam Plc and Bossu Plc, using various financial ratios and metrics.

You are a financial consultant of Synel Investments (SI). The Directors of SI have tasked you to evaluate the financial health of two wholesaling companies – Abodam Plc (Abodam) and Bossu Plc (Bossu) – to help them decide which entity to invest in. Assume that all other factors of the two companies have been considered except their current period’s relative financial performance and position. The financial statements of Abodam and Bossu for the year ended 31 December 2022 are provided below:

Additional information:

  1. The Directors of Bossu announced at the beginning of the current period to repurchase 20% of the company’s issued shares in equal proportion over a three-year period. The purchase of the first tranche is expected to occur around February 2023. At the start of second quarter this year, the major commercial lender of Abodam triggered its covenant modification right to include stricter profit-based clauses in the loan agreement.

  1. During the year, Abodam and Bossu paid ordinary dividends of GH¢450,000 and GH¢315,000 respectively.
  2. Average borrowing rate for the two companies has remained 11% during the period.

Required:

a) Compute the following additional ratios for the two companies:

i) Return on year-end equity

ii) Return on year-end capital employed (where capital employed equals total assets less current liabilities)

iii) Trade receivables days

iv) Debt-to-equity

(8 marks)

b) Write a report to the board of SI to evaluate the relative financial performance and position of Abodam and Bossu, based on the following headings:

i) Profitability

ii) Working capital management

iii) Gearing

iv) Earnings per share

v) Bossu’s repurchase plan vi) Abodam’s loan covenant

(12 marks)

(Total: 20 marks)

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  • 20 Marks

CR – Nov 2014 – L3 – SB – Q3 – Presentation of Financial Statements (IAS 1)

Analyze Prochain Plc’s financial performance and calculate key ratios for loan covenants.

Prochain Plc

The Directors of Prochain Plc have pursued an aggressive policy of expansion in the last two years. They have developed several new products and market share has increased.

The financial statements for the year ended 31 December 2013, which will be presented to the Board of Directors at its next meeting, are being finalised. The financial statements at the year-end are presented below:

Statement of profit or loss and other comprehensive income for the year ended 31 December

The results of the company as well as certain key ratios that will form part of the covenants in respect of the loan facilities will be discussed at the Board of Directors meeting.

Notes:

  1. The movement on the revaluation reserve relates to property, plant, and equipment revalued in the year.
  2. The movement on other reserves relates to the gains on the investments available for sale.
  3. The bonds are repayable on 1 July 2015.

Required:

(a) Based on the results of Prochain Plc for the year ended 31 December 2013, calculate the key ratios for the loan.
(8 Marks)

(b) Prepare a report commenting on the financial performance for the year in relation to the key ratios for the loan.
(12 Marks)

(Total 20 Marks)

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  • 20 Marks

BMF – Nov 2020 – L1 – SB – Q6 – Basics of Business Finance and Financial Markets

Explanation of loan covenants, reasons and benefits for share repurchase, and features of a finance lease arrangement.

(a) For many loan agreements, the borrower is required to provide undertakings or guarantees of some kind.
Distinguish between covenants and guarantees. (5 Marks)

(b) State THREE reasons why a company will repurchase its shares and THREE benefits that will accrue to the company for doing so. (6 Marks)

(c) Companies can acquire assets with finance lease instead of buying assets with equity or debt capital.
State SIX main features of a finance lease arrangement. (9 Marks)

(Total 20 Marks)

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  • 20 Marks

CR – Nov 2023 – L3 – Q5 – Analysis and interpretation of financial statements

Analyze and compare the financial performance and position of two companies, Abodam Plc and Bossu Plc, using various financial ratios and metrics.

You are a financial consultant of Synel Investments (SI). The Directors of SI have tasked you to evaluate the financial health of two wholesaling companies – Abodam Plc (Abodam) and Bossu Plc (Bossu) – to help them decide which entity to invest in. Assume that all other factors of the two companies have been considered except their current period’s relative financial performance and position. The financial statements of Abodam and Bossu for the year ended 31 December 2022 are provided below:

Additional information:

  1. The Directors of Bossu announced at the beginning of the current period to repurchase 20% of the company’s issued shares in equal proportion over a three-year period. The purchase of the first tranche is expected to occur around February 2023. At the start of second quarter this year, the major commercial lender of Abodam triggered its covenant modification right to include stricter profit-based clauses in the loan agreement.

  1. During the year, Abodam and Bossu paid ordinary dividends of GH¢450,000 and GH¢315,000 respectively.
  2. Average borrowing rate for the two companies has remained 11% during the period.

Required:

a) Compute the following additional ratios for the two companies:

i) Return on year-end equity

ii) Return on year-end capital employed (where capital employed equals total assets less current liabilities)

iii) Trade receivables days

iv) Debt-to-equity

(8 marks)

b) Write a report to the board of SI to evaluate the relative financial performance and position of Abodam and Bossu, based on the following headings:

i) Profitability

ii) Working capital management

iii) Gearing

iv) Earnings per share

v) Bossu’s repurchase plan vi) Abodam’s loan covenant

(12 marks)

(Total: 20 marks)

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