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Tirwen Co – Right issues effect on equity gearing and interest cover.

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Tirwen Co – Right issues effect on equity gearing and interest cover.

  • This topic has 9 replies, 4 voices, and was last updated 7 years ago by John Moffat.
Viewing 10 posts - 1 through 10 (of 10 total)
  • Author
    Posts
  • June 10, 2014 at 7:23 am #175608
    acca2050
    Participant
    • Topics: 41
    • Replies: 51
    • β˜†β˜†

    This is modified question by BPP of Dec04. They ask for effect of right issue finance used for redemption of $4500 loan notes, on equity gearing and interest cover.

    Current info:
    ordinary share ( $0.50 par ) $2000
    Reserves $1500loan notes (12%) $4500

    New:
    Right issues 1 for 5 = 800 rights i.e, 4000 ordinary shares/5
    Right issues value $3.4 @ 800 = $2720 – $220(costs) = $2500
    $2500 used for redemption = $2000 loan notes

    PBIT $2128
    Interests $328
    Profit after interest $1800
    Tax30% $540
    Profit a/ int & tax $1260

    I dont want you to do interest cover however, it is done by me on right path.

    BUT

    Debt/Equity ration seems to be interferring at new value:
    $2000/$6000*

    *from where this figure arrives, I guess = $3500 previous equity + 800 rights @ $3.4. Even then this figure is not pursued πŸ™

    Kindly help me at this point.

    Many Thanks

    June 10, 2014 at 8:10 am #175620
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • β˜†β˜†β˜†β˜†β˜†

    The company is raising $2,500 additional equity finance. This will increase share capital and reserves.

    Currently the equity on the Statement of financial position is 3,500. With an extra 2,500 raised from equity it will increase to 6,000.

    June 10, 2014 at 8:48 am #175627
    cardine
    Participant
    • Topics: 4
    • Replies: 135
    • β˜†β˜†

    Hello Colleague!!!!!!!!

    There is a lack information. What is the CMV of existing shares? It is this value x 4000 shares + 2500 amount raised from right issue. You must add the value of the existing 4000 shares plus right issue value /4000+800 = TERP x 4800.
    The 3500 is saying that it include the rev of 1500 (2000 + 1500); I will tell you that there could be an error. RIP is 3.4 therefore CVM is more!!!!!!
    It is simple asking you to calculate the current D/E after the redemption of loan – 2500. 2000 @ 12% is the interest and thus there is BK OD. there is a missing piece of critical data – MV B4 RI

    June 10, 2014 at 9:37 am #175641
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • β˜†β˜†β˜†β˜†β˜†

    Cardine: Please do not answer questions in this forum – it is the Ask the Tutor Forum and you are not the tutor πŸ™‚
    Please restrict yourself to answering in the general F9 forum.

    What you have written is not correct – there is no lack of information in the question Tirwen. It is a past exam question and the examiner wanted the debt/equity ratio based on Statement of financial position (Balance Sheet) values, not on market values.

    June 10, 2014 at 9:38 am #175642
    acca2050
    Participant
    • Topics: 41
    • Replies: 51
    • β˜†β˜†

    Thanks John

    June 10, 2014 at 9:38 am #175643
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • β˜†β˜†β˜†β˜†β˜†

    You are welcome πŸ™‚

    June 10, 2014 at 6:04 pm #175778
    cardine
    Participant
    • Topics: 4
    • Replies: 135
    • β˜†β˜†

    Mr Tutor, I assumed that it was the book value of D/E base on the information that is there. I have a BPP FM book latest version and I do not find that question in it. So I presumed that there was lack of information as it is.

    It was not my intention to misguide anyone and thus as I saw the question – pops out at me; I tried to help not recognizing that it was your forum. The information is limited to me and, if I don’t have it, and comment on what I see – normal for any being, whether human or animals.

    I am a human being who want everyone to rise to the sky if they so desire; thus any information I have – it is shared. Your territory – Sir, and there is freedom of speech. We MUST take care in everything we do.

    Regards,

    June 10, 2014 at 6:17 pm #175785
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • β˜†β˜†β˜†β˜†β˜†

    Thank you Cardine.

    It is not a problem, but just please leave questions in the Ask the Tutor Forum for me to answer πŸ™‚

    December 2, 2017 at 5:41 pm #419769
    frantisek
    Member
    • Topics: 4
    • Replies: 7
    • β˜†

    Dear John,

    just a quick question. The answer to this question says:

    current EPS = share price QPE ratio = $4.00 Q15.24 = 26,25c
    number of shares = $2,000,000 Q50c = 4 million

    Can you please advise what is meant by those “Q”?

    Many thanks.

    December 3, 2017 at 5:38 am #419838
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • β˜†β˜†β˜†β˜†β˜†

    There is something wrong in the typing in your book!!!

    The Q is actually a dividing sign “/” !!!

    (So, for example, number of shares = $2,000,000 / 50c = 4 million.)

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