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Conejo

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Conejo

  • This topic has 5 replies, 2 voices, and was last updated 3 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • March 3, 2022 at 1:27 pm #649726
    joannsusan97
    Participant
    • Topics: 14
    • Replies: 16
    • ☆

    Hello sir

    I have come across questions asking to “discuss the impact of proposed financial reconstruction and proposals on the use of funds on equity and new debt holders”. This is a reference to the conejo question.

    What are the factors that they would consider? I wasnt able to understand very well from the answer provided.

    March 3, 2022 at 3:38 pm #649740
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54674
    • ☆☆☆☆☆

    In general, equity shareholders will be concerned about the effect on the earnings per share, the effect on the level of gearing, the effect on future dividends, and whether there are any conditions (covenants) attaching to any new borrowings.

    Again in general, debt lenders will be concerned about the effect on the level of gearing, the ability of the company to pay the interest on any new borrowings, and the likely ability of the company to make repayments of borrowings when they fall due.

    In Conejo not all of the above will necessarily cause the equity or debt lenders to be worried, but they should all be mentioned. If you have any specific questions as to the comments made in the answer to Conejo then do say.

    March 4, 2022 at 7:56 am #649791
    joannsusan97
    Participant
    • Topics: 14
    • Replies: 16
    • ☆

    Within the impact on equity holders, im not able to understand the last two stanzas mentioned and the last stanza within impact on debt holders.

    Why is it that shareholders are concerned about covenants and the payment of interest to debt holders?

    March 4, 2022 at 2:55 pm #649821
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54674
    • ☆☆☆☆☆

    A common covenant restricts the level of gearing in the future. That might be that they cannot raise more debt finance in the future.
    Equity is concerned about interest payments because they have to be paid before the company can pay out any dividends.

    Debt lenders do not want the company to take unnecessary risks because that would make the ability of the company to pay interest and/or to later repay the debt more risky.

    March 4, 2022 at 8:24 pm #649841
    joannsusan97
    Participant
    • Topics: 14
    • Replies: 16
    • ☆

    Okay, thank you sir!

    March 5, 2022 at 7:54 am #649860
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54674
    • ☆☆☆☆☆

    You are welcome.

  • Author
    Posts
Viewing 6 posts - 1 through 6 (of 6 total)
  • The topic ‘Conejo’ is closed to new replies.

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