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Hello SIr, kindly explain the following for part (b) of the ques:
Why has the examiner put $10m loss?? I mean I understand we bought back on loss? but why put it there at all? We raised $90m and we spent that? so what is the rationale behind putting the loss there?
Another thing is that our retained earning should increase by the excess profit yeah? 31.78-27.3= but the answer key doesnt do so.. please help me understand, It’d mean a lot!They are paying $90M to redeem bonds with a nominal value of $80M.
Therefore on the SOFP the cash falls by $90M, the long-term liabilities fall by only $90M and the remaining $10M reduces the retained earnings.The earnings do increase as you state. However the question needs to know whether or not the MV per share will be higher or lower (because this determines whether or not it is financially acceptable to the shareholders). To get the MV per share we apply the PE ratio, and can then compare it with the MV if instead there is a rights issue.
Thank you SIr,
about the earnings,
In the answer they didnt increase the earnings that way to later multiply with P/E. I mean if I include the increase in profits and then get MV, would that be acceptable to the examiner?
The answer does increase the earnings.
Currently the profit before interest and tax is 49. At the moment they are paying interest of 10 but will save 6.4 of the interest by redeeming the bonds, so will only pay interest of 3.6.
Therefore the new profit will be 45.4 before tax and therefore 31.78 after tax.
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