Reference no: EM132234288
Assume you are an external consultant.
Flash plc is a manufacturer of solar panels and supply industrial sized equipment to offices and factories across the UK.
The company'sshares are currently quoted at 178 pence per share. Flash plchas experienced strong growth over recent years and has built strong relationships with their customers due to the company's focus on quality, on-time delivery, and after sales service.
There are several other competitors in the industry and to remain competitive Flash plc is looking to develop more efficient panels that can produce electricity from lower levels of sunlight.In order to do this the company will need to invest in machinery which will cost £6,000,000 and will all be paid in the next few weeks.It has been agreed that this expenditure will capitalised under Non-Current Assets and will be depreciated over three years on a straight-line basis.There will be no residual value to the research and development after the three years due to the expected changes in technology.
The forecast financial statements are given in the appendix at the end of this document.
You have obtained the followingforecast information regarding 2019:
1 Flash plc expects revenue to increase by 8% in 2019. Costs and expenses, excluding depreciation, are expectedto increase by an average of 5% per annum.
2 Finance costs, other than on new debt, are expected to remainunchanged.
3 The ratio of trade receivables to revenue willremain the same.
4 The ratio of trade payables to costs and expenses (excluding depreciation)will remain the same.
5 The value of inventories is likely to remain at2018 levels.
6 The non-current assets shown in the 2018 financial statements are not depreciated in Flash plc's accounting records as they are land and buildings. All other assets are either rented or leased on operating leases and therefore are not depreciated.
7 The dividend pay-out ratio will remain unchanged
8 The corporation tax rate is 20%, with amounts payable or refundable one year's in arrears. Depreciation of the new technology is a tax-deductible expense.The company has yet to decide how to finance the £6,000,000 for the new machinery, and are considering the following two options;
1) A rights issue at £1.50 per share.
2) An irredeemable bond at an interest rate of 7% per annum,
Flash plc has fourfinancial objectives as follows:
• to earn a return on capital employed of 35% per annum
• increase profit after tax each year
• increase earnings per share each year
• maintain a current ratio of at least 1.45:1
The Finance Director has asked you, as an external consultant, to prepare a report for presentation to the board of directors which will include the following:
(i) forecast income statements and balance sheet for the year ending 31 December 2019 if the rights issue was used to finance the investment.
(ii) forecast income statements and balance sheet forthe year ending 31 December 2019 if the bond was used to finance the investment.
(iii) a discussion of whether the company is likely to achieve its financial objectives in the year ending 31 December 2019.
(iv) a justified recommendation as to the most appropriate source of finance from the above two options.