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Current and Revised Gearing and EPS

Good Day,

Could you please assist with the attached question.

Regards

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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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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