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Kaplan Exam Kit, Qno. 45 Arwin

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Kaplan Exam Kit, Qno. 45 Arwin

  • This topic has 1 reply, 2 voices, and was last updated 3 years ago by John Moffat.
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  • Author
    Posts
  • November 11, 2019 at 1:22 am #551994
    meacca123
    Member
    • Topics: 2
    • Replies: 0
    • ☆

    ARWIN

    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

    Sales revenue
    Cost of sales

    50,000
    30,000

    Gross profit
    Administration costs

    20,000
    14,000

    Profit before interest and tax
    Interest

    6,000
    300

    Profit before tax
    Taxation at 30%

    5,700
    1,710

    Profit after tax

    3,990

    Changes in equity

    Dividends
    Net change in equity (retained profits)
    Statement of financial position

    2,394
    1,596

    Net non-current assets
    Net current assets .

    20,100
    4,960

    25,060

    Ordinary shares, par value 25c
    Retained profit
    12% loan stock (redeemable in six years)

    2,500
    20,060
    2,500

    25,060

    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.

    Required:
    (a) For each financing proposal, prepare the forecast statement of profit or loss after
    one additional year of operation.
    (5 marks)
    (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.
    (12 marks)
    (c) Comment on the view that businesses are unlikely to have high financial gearing
    and high operating gearing.
    (3 marks)

    (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 #552015
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51555
    • ☆☆☆☆☆

    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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    Posts
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