Equity financing

FM – L2 – Q104 – Working Capital Management

Analyze Peak Enterprises Limited's financial statements to determine if it is overtrading and discuss its implications.

Question

Peak Enterprises Limited is a small manufacturing company. Its summarized accounts for the last two years are presented below:

Statements of Financial Position as at 31st March

	Year 5 (GH¢’000)	Year 6 (GH¢’000)
Fixed Assets	1,130	1,080
Current Assets
Inventory	210	260
Trade Receivables	120	160
Cash	30	–
Total Current Assets	360	420
Total Assets	1,490	1,500
Equity and Liabilities
Equity Shares of GH¢0.25	200	200
Accumulated Profits	680	500
Total Equity	880	700
Medium-Term Bank Loan	200	150
Current Liabilities
Bank Overdraft	140	250
Trade Payables	200	280
Other Payables	70	120
Total Current Liabilities	410	650
Total Equity and Liabilities	1,490	1,500

Statements of Profit or Loss for the Year Ending 31st March

	Year 5 (GH¢’000)	Year 6 (GH¢’000)
Sales	1,800	2,900
Gross Profit	210	260
Profit Before Tax	120	160
Taxation	(30)	(40)

Required
(a) Comment on whether there is any evidence that Peak Enterprises Limited is overtrading.
(b) Discuss the implications of overtrading for Peak Enterprises Limited.

Answer

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Tags: Bank Overdraft, Cash Flow, Equity financing, Financial Ratios, Inventory Management Civilian Financial Statements, Overtrading, Trade Payables, Trade Receivables, Working Capital
Level: Level 2

Topic: Working capital management

FM – L2 – Q36 – Sources of finance: equity

Prepare profit/loss statements, calculate EPS, and determine gearing for three financing schemes for Brighton Enterprises' expansion.

Question

Brighton Enterprises wishes to expand its production facilities to meet an increase in sales demand for its products. It will need GH₵18 million of new capital to invest in equipment. It is expected that annual profit before interest and taxation will increase by GH₵5 million.
Brighton Enterprises is considering the following three possible methods of financing the expansion programme:
(i) Issuing 9 million GH₵0.50 equity shares at a premium of GH₵1.50 per share.
(ii) Issuing 12 million 12% GH₵1 preference shares at par and GH₵6 million 10% debentures at par.
(iii) Issuing 6 million equity shares at a premium of GH₵1.50 per share and GH₵6 million 10% debentures at par.

Assume that the rate of tax on profits is 25%.

The statement of financial position of Brighton Enterprises as at 31st November Year 6 is as follows:

Statement of financial position as at 30th November Year 6

	GH₵m	GH₵m
Non-current assets		24.8
Current assets
Inventory	18.5
Trade receivables	21.4
Bank	1.9
		41.8
Total assets		66.6
Equity and liabilities
GH₵0.50 ordinary shares		10.0
Accumulated profits		22.4
Total equity		32.4
10% Debentures		15.0
Current liabilities
Trade payables
Taxation
		19.2
Total equity and liabilities		66.6

A statement of profit or loss for the year to 30th November Year 6 is as follows:

	GH₵m
Sales	115.4
Profit before interest and taxation	17.9
Interest payable	1.5
Profit before taxation	16.4
Tax (25%)	4.1
Profit after taxation	12.3

Required
(a) For each of the financing schemes under consideration:
(i) prepare a projected statement of profit or loss for the year ended 30 November Year 7.
(ii) calculate the expected earnings per share for the year ended 30th November Year 7.
(iii) calculate the expected level of financial gearing as at 30th November Year 7, assuming that dividend payments during the year are GH₵0.30 per share.

(b) Assess each of the three financing schemes under consideration from the viewpoint of an existing equity shareholder in Brighton Enterprises.

Answer

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Tags: Debt financing, Earnings per share, Equity financing, Financial gearing, Financing schemes, Shareholder perspective
Level: Level 2

Topic: Sources of finance: equity

FM – L2 – Q33 – Dividend policy

Suggest share price for Kumasi Transport PLC based on 25% dividend payout using dividend growth model.

Question

he directors of an all-equity company are considering the company’s policy on dividends and retentions. The cost of capital is 9% and the company is able to invest in new capital projects that will earn this return. The company’s shares are quoted and traded on a major stock market.

In the year just ended, the earnings per share were GH¢2.00 per share. The company pays a dividend annually, and is about to pay a dividend for the year just ended on the basis of its selected dividend and retentions policy.

Required:

Suggest what the company’s share price might be if the directors select a policy of paying annual dividends that are equal to:

(a) 25% of earnings

(b) 50% of earnings

Answer

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Tags: Dividend Growth Model, Dividend Policy, Earnings retention, Equity financing, Share price valuation
Level: Level 2

Topic: Dividend policy

FM – L2 – Q29 – Sources of finance: equity

Calculate the theoretical ex-rights price per share for Kumasi Lubricants Plc's rights issue to fund new equipment.

Question

Kumasi Lubricants Plc wishes to increase its production capacity by purchasing additional plant and equipment at a cost of GH¢3.8 million. The abridged statement of profit or loss for the year ended 30th November 20X6 is as follows:

	GH¢m
Sales turnover	140.6
Profit before interest and taxation	8.4
Interest	6.8
Profit before tax	1.6
Tax	0.4
Profit after taxation	1.2

Earnings per share: 15 cents

In order to finance the purchase of the new plant and equipment, the directors of the company have decided to make a rights issue equal to the cost of the equipment. The shares are currently quoted on the stock exchange at GH¢2.70 per share and the new shares will be offered to shareholders at GH¢1.90 per share.
Required:
(a) Calculate:
(i) the theoretical ex-rights price per share

(ii) the value of the rights on each existing share

(iii) Existing P/E ratio = GH¢2.70 / GH¢0.15 = 18.0

(b) What are the options available to a shareholder who receives a rights offer from a company?

Answer

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Tags: Equity financing, Rights issue, Shareholder options, Stock market
Level: Level 2

Topic: Sources of finance: equity

FM – L2 – Q28 – Sources of finance: equity

Calculate the theoretical ex-rights price per share for a company's 1 for 4 rights issue to finance new plant and equipment.

Question

A company, Kofi Enterprises Plc, wishes to increase its production capacity by purchasing additional plant and equipment. Its statement of profit or loss for the year ended 30th November Year 3 is as follows:

	GH¢m
Sales revenue	224
Profit before interest and taxation	45.5
Interest	11.4
Profit before tax	34.1
Tax	7.7
Profit after tax	26.4

Earnings per share: GH¢0.30

To finance the new investment, Kofi Enterprises Plc will make a 1 for 4 rights issue. The shares are currently quoted on the Stock Exchange at GH¢5.50 per share and the new shares will be offered to shareholders at GH¢4.50 per share.
Ignore the transaction costs of the share issue.

Required:
(A) Calculate the theoretical ex-rights price per share.

(B) Calculate the value of the rights on each existing share.

Answer

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Tags: Equity financing, Rights issue, Share valuation, Stock exchange, Value of rights
Level: Level 2

Topic: Sources of finance: equity

Tag (SQ): Equity financing

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FM – L2 – Q104 – Working Capital Management

Analyze Peak Enterprises Limited's financial statements to determine if it is overtrading and discuss its implications.

FM – L2 – Q36 – Sources of finance: equity

Prepare profit/loss statements, calculate EPS, and determine gearing for three financing schemes for Brighton Enterprises' expansion.

FM – L2 – Q33 – Dividend policy

Suggest share price for Kumasi Transport PLC based on 25% dividend payout using dividend growth model.

FM – L2 – Q29 – Sources of finance: equity

Calculate the theoretical ex-rights price per share for Kumasi Lubricants Plc's rights issue to fund new equipment.

FM – L2 – Q28 – Sources of finance: equity

Calculate the theoretical ex-rights price per share for a company's 1 for 4 rights issue to finance new plant and equipment.

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FM – L2 – Q104 – Working Capital Management

Analyze Peak Enterprises Limited's financial statements to determine if it is overtrading and discuss its implications.

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FM – L2 – Q36 – Sources of finance: equity

Prepare profit/loss statements, calculate EPS, and determine gearing for three financing schemes for Brighton Enterprises' expansion.

You're reporting an error for "FM – L2 – Q36 – Sources of finance: equity"

FM – L2 – Q33 – Dividend policy

Suggest share price for Kumasi Transport PLC based on 25% dividend payout using dividend growth model.

You're reporting an error for "FM – L2 – Q33 – Dividend policy"

FM – L2 – Q29 – Sources of finance: equity

Calculate the theoretical ex-rights price per share for Kumasi Lubricants Plc's rights issue to fund new equipment.

You're reporting an error for "FM – L2 – Q29 – Sources of finance: equity"

FM – L2 – Q28 – Sources of finance: equity

Calculate the theoretical ex-rights price per share for a company's 1 for 4 rights issue to finance new plant and equipment.

You're reporting an error for "FM – L2 – Q28 – Sources of finance: equity"

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