You must be a registered user and login to this site before practicing questions on this software. 
Use user login form to login or to request for new account. 
Use contact form if you require further assistance on this issue.

Omani Co is a stock exchange listed company that is concerned by its current level of debt finance. It plans to make a rights issue and to use the funds raised to pay off some of its debt. The rights issue will be at a 25% discount to its current ex-dividend share price of $8 per share and Omani Co plans to raise $300 million, all of the proceeds will be used to repay 9% bond to whatever extent possible. Omani Co believes that paying off some of its debt will not affect its price/earnings ratio, which is expected to remain constant.

Extracts of recent financial statements of Omani Co are attached below:

STATEMENT OF PROFIT OR LOSS
  $'000
Revenue 547,000
Cost of sales (458,400)
Profit before interest and tax 88,600
Interest (31,500)
Profit before tax 57,100
Tax (17,130)
Profit after tax 39,970

 

STATEMENT OF FINANCIAL POSITION
  $'000
Equity  
Ordinary shares ($1 nominal) 75,000
Retained earnings 252,000
  327,000
Long-term liabilities  
9% bonds ($100 nominal) 350,000
  677,000

 

The 9% bonds are currently trading at $120.00 per $100 bond and bondholders have agreed that they will allow Omani Co to buy back the bonds at this market value. Omani Co pays tax at a rate of 30% per year.

Requirements:

a

For a financial management report you are required to prepare an appendix covering following calculations:

  1. Calculate the theoretical ex rights price per share of Omani Co following the rights issue. (2 marks)
  2. Calculate the impact of the decision of using cash raised by the rights issue to buy back bonds on the EPS and share price of Omani Co (5 marks)
  3. Calculate the impact of the decision of using cash raised by the rights issue to buy back bonds on financial risk, measured as gearing (debt / equity) and interest cover of Omani Co. (3 marks)
Marks: 10
b

Based on the appendix you have produced under requirement (a) discuss:

  • Whether the decision to use proceeds of right share issue to repay loan is acceptable to the share holders and company overall considering risk and values.
  • Comment on the belief that the current Price / Earnings ratio will remain constant after the right issue.
Marks: 6
c

Discuss the dangers to a company of a high level gearing, including in your answer an explanation of the business risk and financial risk.

Marks: 4

Answers submitted

Created by Ref Marking Action
Abhro Gourab Das's picture
Abhro Gourab Das
12/08/2020 - 01:28
c
10192
4
Rakhi Gupta's picture
Rakhi Gupta
11/13/2020 - 13:31
a
10138
10
Rakhi Gupta's picture
Rakhi Gupta
11/13/2020 - 14:03
b
10140
6
Rakhi Gupta's picture
Rakhi Gupta
11/13/2020 - 14:26
c
10142
4
Rakhi Gupta's picture
Rakhi Gupta
11/11/2020 - 20:12
a
10072
10
Rakhi Gupta's picture
Rakhi Gupta
11/08/2020 - 12:35
a
10070
10
Rakhi Gupta's picture
Rakhi Gupta
11/08/2020 - 13:32
b
10074
6
Abhro Gourab Das's picture
Abhro Gourab Das
09/01/2020 - 18:54
a
9568
10
Nafeez Imtiaz Hossain's picture
Nafeez Imtiaz H...
05/05/2020 - 15:23
b
9162
6
Nafeez Imtiaz Hossain's picture
Nafeez Imtiaz H...
05/05/2020 - 15:34
c
9164
4
Nafeez Imtiaz Hossain's picture
Nafeez Imtiaz H...
05/01/2020 - 21:46
a
9158
10
Nafeez Imtiaz Hossain's picture
Nafeez Imtiaz H...
05/01/2020 - 20:40
a
9156
10
Md. Shadequl Islam Shamim's picture
Md. Shadequl Is...
04/29/2020 - 20:25
a
9144
10
Md. Shadequl Islam Shamim's picture
Md. Shadequl Is...
04/29/2020 - 20:43
b
9150
6
Md. Shadequl Islam Shamim's picture
Md. Shadequl Is...
04/29/2020 - 20:53
c
9154
4
Nafeez Imtiaz Hossain's picture
Nafeez Imtiaz H...
04/29/2020 - 20:35
a
9146
10
Apurba nandy's picture
Apurba nandy
03/04/2020 - 19:10
a
9046
10