- November 11, 2019 at 1:22 am #551994meacca123Member
- Topics: 2
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Arwin plans to raise $5m in order to expand its existing chain of retail outlets. It can raise
the finance by issuing 10% loan stock redeemable in ten years time, or by a rights issue at
$4.00 per share. The current financial statements of Arwin are as follows:
Statement of profit or loss for the last year
Cost of sales
Profit before interest and tax
Profit before tax
Taxation at 30%
Profit after tax
Changes in equity
Net change in equity (retained profits)
Statement of financial position
Net non-current assets
Net current assets .
Ordinary shares, par value 25c
12% loan stock (redeemable in six years)
The expansion of business is expected to increase sales revenue by 12% in the first year.
variable cost of sales makes up 85% of cost of sales. Administration costs increase by
5% due to new staff appointments. Arwin has a policy of paying out 60 of profit after tax
as dividends and has no overdraft.
(a) For each financing proposal, prepare the forecast statement of profit or loss after
one additional year of operation.
(b) Evaluate and comment on the effects of each financing proposal on the following:
(i) Financial gearing
(ii) Operational gearing
(iii) Interest cover
(iv) Earnings per share.
(c) Comment on the view that businesses are unlikely to have high financial gearing
and high operating gearing.
(Total: 20 marks)
Please help me solve the part B of the question, as I’m confused with financial gearing part and its amounts.
Sincere thanks!November 11, 2019 at 9:56 am #552015John MoffatKeymaster
- Topics: 57
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Please do not type out complete questions like this – the question is copyright and so we should not publish it on our website.
I explain both financial and operating gearing in the free lectures on Chapter 13 of our free lecture notes. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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