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Current and Revised Gearing and EPS

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Paradise Limited wishes to raise R10 million in external finances by issuing either ordinary shares or 14 % preference shares or a 12 % unsecured loan. These funds are expected to generate additional operating profits of R3.28 million.

The ordinary shares are to be issued at a discount of 10 % and the current dividend will be maintained. Issue cost may be ignored.

The current summarised financial statements are presented.

Summarised income statement:
(R 000's)

Turnover 45 320

Operating Profit 11 170
Interest (2 280)
Profit before Tax 8 890
Tax (35%) 3 112
Earnings available to ordinary shareholders 5 778
Dividend 3 467
Retained Earnings 2 311

Summarised Balance Sheet:

Non-Current Assets (Net) 24 260

Current Assets 28 130
Total Assets 52 390

Owners Equity and Liabilities
Shareholders Fund 22 020
Ordinary Shares (50 cents par value) 5 000
Share Premium 4 960
Other Reserves 12 060

13% Debentures 12 000

Current Liabilities 18 370
Total Equity and Liabilities 52 390

* includes a bank overdraft of R6 million.

The current share price is 350 cents, i.e. R3.50

Required:
3.1 Calculate the current EPS (earnings per share).

3.2 Calculate the current gearing (debt:equity using book values).
(Take debt to include both debentures and bank overdraft)

3.3 Calculate the revised EPS and gearing using ordinary share financing.

3.4 Calculate the revised EPS and gearing using preference share financing.

3.5 Calculate the revised EPS and gearing using loan financing.

3.6 Prepare a brief report, with supporting evidence, recommending which of these three financing sources the company should use.

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https://brainmass.com/business/accounting/current-revised-gearing-eps-157265

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Question 3: Gearing (50)
Paradise Limited wishes to raise R10 million in external finances by issuing either ordinary shares or 14 % preference shares or a 12 % unsecured loan. These funds are expected to generate additional operating profits of R3.28 million.

The ordinary shares are to be issued at a discount of 10 % and the current dividend will be maintained. Issue cost may be ignored.

The current summarised financial statements are presented.

Summarised income statement:
(R 000's)

Turnover 45 320

Operating Profit 11 170
Interest (2 280)
Profit before Tax 8 890
Tax (35%) 3 112
Earnings available to ordinary shareholders 5 778
Dividend 3 467
Retained Earnings 2 311

Summarised Balance Sheet:

Non-Current Assets (Net) 24 260

Current Assets 28 130
Total Assets 52 390

Owners Equity and Liabilities
Shareholders Fund 22 020
Ordinary Shares (50 cents par value) 5 000
Share Premium 4 960
Other Reserves 12 060

13% Debentures 12 000

Current Liabilities 18 370
Total Equity and Liabilities 52 390

* includes a bank overdraft of R6 million.

The current share price is 350 cents, i.e. R3.50

Required:
All figures used in ...

Solution Summary

The solution explains the calculation of current gearing and EPS and revised gearing and EPS for different types of external financing.

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Gearing and Calculating Earnings per Share

Tobi Industries wishes to undertake a project that will cost R2 500 000. The project has already been evaluated and has a positive net present value. The decision now facing management is how to finance the project. Three alternative financial "packages" are under consideration:
- Issue 1250 000 new ordinary shares at 200 cents each, or
- Issue R2 500 000 Debenture, due in 2020 at a fixed rate of interest 7%, or
- Issue 1 000 000, 15%, R2.50 preference shares.

The project is expected to generate an extra R500 000 of earnings (before interest and tax) each year. The company pays tax at 30% and follows a policy of paying a constant ordinary dividend per share.
The current abridged income statement and balance sheet are as follow:
Abridged Income statement Rand
Operating profit 2,200,000
Interest 600,000
Profit before tax 1,600,000
Tax 480,000
Profit after tax 1,120,000
Dividend 320,000
Retained Income 800,000

Abridged Balance Sheet
Non Current Assets 7,000,000
Current Assets 6,000,000
13,000,000
Share capital and Reserves 8,250,000
Ordinary Share Capital (50 cents) 1,000,000
Retained Income 7,250,000
Non- current liabilities: 16% Debenture, due in 2017 3,750,000
Current liabilities 1,000,000
13,000,000
Required:
3.1 Calculate the current earnings per share (EPS)
3.2 Calculate the current gearing (non-current debt/equity, using book value.
3.3 Calculate the revised EPS and gearing using ordinary share financing.
3.4 Calculate the revised EPS and gearing using debenture financing.
3.5 Calculate the revised EPS and gearing using preference share financing.
3.6 Prepare a brief report, with supporting evidence, recommending which of these three financing sources the company should use. (Average gearing level of the industry is 90%).

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