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Good evening,
I am busy practicing Grenarp Co in the BPP revision kit. In the answer it says that:
“Before the rights issue the debt/equity ratio was 35% on a book value basis and 45% on a market value basis and after the redemption on loan notes the debt/equity ratio would fall to 21% on a book value basis and 28% on a market value basis”.
I have figured out how to get the book value basis before the rights issue but am not figuring out which figures they used for the other ratios.
Please any help?
Thank you so much
Before the rights issue, the market value of the equity was 10m x 2 x $3.50 = $70m
The market value of the loan notes was 30 x 104/100 = $31.2MSo the debt equity ratio was 31.2/70 = 45%
After the rights issue, the market value of the shares is $74.64m, and the market value of the remaining loan notes is 20 x 104/100 = 20.8m
So the new debt/equity ratio = 20.8/74.64 = 28%Hi Mr. John,
I can’t figure out how to get the debt/equity ratio using book value after the redemption of loan notes which is 21%. Could you please help? Thank you.
The rights issue would increase the book value of equity by 11.2M to a total of 85 + 11.2 = 96.2M (part goes to share capital and part to reserves as per Paper F3, but in total equity increases by 96.2M).
They repay loan notes with a nominal value of $10M and therefore the book value of the loan notes falls to 20M.
The debt / equity ratio is then 20/96.2 = 21%.
Do note from the marking scheme that there were no marks specifically awarded for calculating the gearing ratio using book values – it doesn’t actually mean very much, as you will know from my free lectures.
You can find lectures working through every question in this exam (including Grenarp) linked from this page:
https://opentuition.com/acca/fm/acca-fm-revision-lectures/Hi,
Could you explain how you got the After the rights issue, the market value of the shares is $74.64m please?
As it would be 10m/0.50 x 3.50=70m not sure where the extra 4.64m comes from?
Thank you
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