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Revised Balance Sheet, Financial Ratios

The summarised Balance Sheet of Omicron Ltd at 31 December 2002 was as follows:

Fixed assets 1900
Net current assets 1500
3400
10% debentures 2003/2004 400
3000
Share capital and reserves
Ordinary shares of $1 1000
8% preference shares of $1 800
Share Premium account 180
Profit and Loss Account 1020
3000

On 1 January 2003 before any other transactions had taken place the following occurred.
1. Redemption of all the debentures at a premium of 5%.
2. Redemption of all the preference shares at $1.25 per share. The shares had originally been issued at $1.10 per share.

REQUIRED
(a) A revised Balance Sheet at 1 January 2003 as it appeared after the redemption of the debentures and the preference shares.

Omicron Ltds profit before interest for the year ended 31 December 2002 was $600000. A dividend of $0.40 was paid on its ordinary shares for the year. The ordinary shares were quoted at $3.50 on 31 December 2002 and at $3.84 on 1 January 2003 after the redemption of the debentures and preference shares.
REQUIRED
(b) Calculate the following ratios both at 31 December 2002 and on 1 January 2003 after the debentures and preference shares had been redeemed. Give your answers to two decimal places.
(I) Gearing
(i Dividend cover
(iii) Earnings per share (EPS)
(iv) Price earnings ratio (PER)
(v) Dividend yield [

REQUIRED
(c) Comment on the changes in the ratios you have calculated in (b) as a result of the transactions in (a).

In May 2003 the directors of Omicron Ltd plan to build an additional factory. This requires initial capital expenditure of $600000 and is expected to start producing revenue and be profitable in three years' time. The directors are considering raising the additional funds for the project by one of the following methods.
1. The issue of 12% debentures 2006 at par.
2. A rights issue of ordinary shares at $4 per share.
3. An issue of ordinary shares to the public at $4 per share.
The present rate of ordinary dividend would be maintained on all the old and new shares for the foreseeable future.
REQUIRED
(d) Discuss each of the methods of raising the capital, and state with reasons which method the directors should choose.

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Solution

(a) A revised Balance Sheet at 1 January 2003 as it appeared after the redemption of the debentures and the preference shares.

Recasting the summarised balance sheet with Assets on one side and Shareholder's equity and liabilities on the other
The summarised Balance Sheet of Omicron Ltd as on 31 December 2002
Assets Liabilities + Shareholder's Equity
in '000 $ in '000 $
10% debentures 2003/2004 400
Fixed assets 1900 Share capital and reserves
Net current assets 1500 Ordinary shares of $1 1000
3400 8% preference shares of $1 800
Share Premium account 180
Profit and Loss Account 1020
3400

On 1 January 2003 before any other transactions had taken place the following occurred.
1. Redemption of all the debentures at a premium of 5%.
2. Redemption of all the preference shares at $1.25 per share. The shares had originally been issued at $1.10 per share.

1 Redemption of all debentures
Amount required=1.05*400= 420
Thus total cash outflow= 420
Net current assets will be reduced by 420
Net current assets =1500-420= 1080
On the liabilities side
10% debentures 2003/2004=400-400= 0
Share Premium account will be reduced by 20
Share Premium account=180-20= 160

2. Redemption of all the preference shares at $1.25 per share. The shares had originally been issued at $1.10 per share.

Amount required=800*1.25= 1000
Thus total cash outflow= 1000
Net current assets will be reduced by 1000
Net current assets =1080-1000= 80

On the liabilities side
8% preference shares of $1=800-800 0
The share premium account is insufficient to meet the requirement of additional 200 as it has already been reduced to 160
Share Premium ...

Solution Summary

The solution provides answers to 2 questions- one on revised balance sheet and one of calculation of financial ratios.

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