Reference no: EM13492707

Question

Part a)

Alpha Ltd had the following equity balance at July 1, the beginning of the year

                Share capital 10,000 $10 shares   $100,000

                Reserves                                    $80,000

                Retained Earnings                        $50,000

Alpha Ltd's profit for the year was $40,000. During the year the following events and transactions occurred;

Dec 30                   Declared interim cash dividend of $1 per share

Jan 15                    Paid interim cash dividend

Mar 31                   4-for 1 share split

June 30                  declared cash dividend o0f $1 per share

June 30                  transferred $15,000 to general reserve

Required

a)      Prepare journal entries to record the transactions affecting equity during the period

b)      Prepare a statement showing the changes in retained earnings during the year

c)      Prepare the equity section of the balance sheet

d)      Calculate the dividend payout ratio and return on shareholders' equity

Part b)

Investors Ltd Shareholders equity is as follows

Share Capital                                                      $4,000,000

Retained earnings and reserves                              $1,000,000

Investor ltd plans to expand its operations by establishing a branch in Singapore. The new branch will cost $2.5million. Expected profits before tax and interest when the new branch is operational are $1.2 million. The tax rate is 30%. Investors Ltd is considering 2 financing options;

a)      Borrow $2.5million at 8% interest

b)      Issue 100,000 shares at $25

Required; Which funding alternative yields the higher return on equity. What other factors should be considered.