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Equity and Debt finance

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Equity and Debt finance

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • Author
    Posts
  • January 29, 2021 at 1:15 am #608398
    carmenl26
    Member
    • Topics: 12
    • Replies: 4
    • ☆

    Hi sir, I have calculated many times but I couldnt get the answer.

    STES is a listed ungeared company in Malaysia with paid capital of 150m shares. At year ending 31 Dec 2019, its market capitalisation stood at $1050m with earnings before interest and tax of $80m. The Directors predicts that its earnings to increase by 15% for the following year (2020) as a result of several government projects.
    The company wishes to raise $270m (net) to finance its operations next year, and has considered the following options:
    Option 1: Offer right issue at 20% discount of its market price, or
    Option 2: Issue 6% loan notes at par value.
    If the first option is selected, there will be $10m transaction cost from the amount raised. It is expected that price earning (P/E) ratio will remain same throughout the forthcoming year.
    For the second option, it is estimated that the P/E ratio will fall by 10% by end of year 2020. There will be transaction cost amounting to $5.5m from the amount the raised.
    The tax rate for company is 25%.

    Q1.
    Determine the price of an equity share in STES in one year’s time assuming finance raised through right issue.
    ANSWER : $6.04

    Q2.
    Determine the price of an equity share in STES in one year’s time assuming finance raised the loan note.
    ANSWER: $5.94

    Thank you.

    January 29, 2021 at 9:47 am #608426
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51529
    • ☆☆☆☆☆

    Q1. The current share price is 1050/150 = $7 and therefore the new shares will be issued at $5.60. They need to raise a total of $280M and will therefore issue 50M new shares (so there are now 200M shares in issue).

    The current PE ratio is 1050 / (75% x 80) = 17.5

    Next years earnings after tax are 80 x 0.75 x 1.15 = 69M
    Therefore total market value will be 17.5 x 69 = $1207.5
    Therefore MV per share = 1207.5/200 = $6.04 per share

    Q2. They need to raise $275.5 with interest at 6%.
    Therefore the earnings next year after interest and tax will be 75% x ((80 x 1.15)- (275.5 x 6%)) = $56.6025

    The new PE ratio = 90% x 17.5 = 15.75
    Therefore the new MV per share = 15.75 x 56.6025 / 150 = $5.94

    I assume that you are using a Revision Kit from one of the ACCA Approved Publishers (as you certainly should be doing) in which case I am astonished that the only had the answer and not the workings!

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