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Hi, John
As the question says, the retained earning in 2016 forecast = net increase in cash.
For question 3 a)i) why the cash would be NIL? Why is the cash don’t increase to 10m?
For Q3 a)ii) why the balancing for cash is 5m? ( I’ve known it derives from 7.6m + 2.4m Retained earning – 5m [ ( is the 5m comes from retained earning or simply the cash (7.6 + 2.4) /2 yrs ]?
Also, in conclusion why Rajiv will be pacified if he retains the loan note?
Why breach current concenant limit would be 90/70 instead of 90/65, since the loan notes replaced by 5m $1 shares?
3 (a) (i) The $10M is used to buy back Gupte’s shares at par, as per the second paragraph of the question.
3 (a) (ii). There are the other effects on cash such as the increasing of the non-current assets, the changes in the current assets and current liabilities, the addition shares issued.
As stated earlier in the question, Rajiv might not like the new arrangement because he gets shares and so loses a certain interest income and instead gets an uncertain dividend income.
The answer state that the covenant is 90/70 only if Rajiv ends up retaining the loan note.
Sir, but I don’t quite understand why the cash has to be minus of 5m?
I’ve only understood cash will be increased from 7.6m +2.4m =10m.
Can you please show me why it has to be minus by 5m?
If they did not either repurchase Gupta’s shares or do the proposed refinancing and investment, then the cash would indeed increase to $10M.
However the question asks you what will happen to the SOFP if they (i) do repurchase Gupta’s shares or (ii) if they do refinance (which will involve buying more non-current assets etc..)
Very appreciated for your help Sir, but I’m still not very clear.
For a)i ) the cash would be NIL, is it becuase we need to buy back shares at $10m with our cash by $10m (7.6m + 2.4m)?
For a)ii) the answer for cash is $5m becuz Rajiv patel’s loan note replaced by $5m shares, so this amount was paid by our cash $10m (7.6+2.4), so this is why $10m has to minus $5m from shares, in arriving $5m balancing figure???
For (a)(i) – yes. That is what I typed in my earlier reply.
For (a)(ii) – no. The loan note is replaced by the issue of new shares – this does not involve paying out any cash.
As I wrote before, if you read note 5 of the question, non-current assets etc are all changing. Buying new non-current assets, increasing current assets and increasing current liabilities all involve cash. The cash figure is the balance needed to make the SOFP balance (you could calculate it separately – calculating how much cash is spent on new non-current assets etc, – but that would just waste time and is not necessary.
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