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m retained earnings = $20m ×
280c/320c = $17.5m.
Amounts in $000 Current Proposal 1
Retained earnings 123,000 104,220
Pls explain the calculation of retained earnings above, is there any other method through which calculations of retained earnings could be done?
can you pls provide link for securitisation process.
Part (a) is more of a straight financial accounts question rather than financial management.
The current retained earnings are $123,000 as given in the question.
If proposal 1 is implemented, the two things will happen. One is that the profit will fall from 26,000 to 24,720, i.e. by $1,280 and therefore the retained earnings will fall by the same amount.
The other is that they will be using the $20M rated from the debt to repay shares. Given that the share price is $3.20 per share it means that they will buy back 20/3.2 = 6.25M shares. As per financial accounting ‘rules’, share capital will reduce by the nominal value of these shares (6.25M x 0.40 = $2.5M) and the remaining 20 – 2..5 = 17.5M will be taken from retained earnings.
Therefore the new retained earnings will be 123,000 – 1,280 – 17,500 = $104,220.
(Again, this is financial accounts and as will all of the professional papers the examiner is allowed to examine anything from any of the other papers. However for AFM this really only ever requires financial accounting knowledge.)
For securitisation, if you use the search box on this page you will find several previous replies from me explaining securitisation.
This one should help you: