Example to show the companys current gearing, Financial Management

Assignment Help:

Q. Example to show the companys current gearing?

The company's current gearing

2000/ 8500 × 100 = 23.53%

The current gearing position is on the low side particularly when compared with the industry average of 35%. This offers an indication that the company still has the scope and capacity to attract more debt. There is nevertheless a large secured bank overdraft, and it is quite likely that quite a high proportion of it represents hard-core debt. It is as well most unlikely that the bankers would call in such a large overdraft at short notice. If the overdraft were included in the gearing calculation, and treated as debt, the gearing ratio 38.1% is a little above the industry average.

Current earning per share ($000)

EPS    3, 000/5,000= 60c per share

(ii) Issue of ordinary shares

Number of new shares =5,000,000/2= 2,500,000 shares

189_Example to show the companys current gearing.png

EPS   4,340/7,500= 58c per share

Gearing   2,000/13,500× 100 = 14.81%

More equity would reduce the gearing further. The gearing in the future would as well tend to fall due to increases in reserves via retained earnings.

The scheme would decrease the EPS by 2c per share when compared with current earnings. Other considerations which must be looked at are

?? The control factor that is those shareholders who currently control the company could lose control unless they buy some of the shares being offered.

(iii) 5% convertible loan stock

262_Example to show the companys current gearing1.png

Undiluted EPS   4172/5000= 83c per share

The gearing at the time of issuing the convertible loan stock would be

7000/13500× 100 = 51.85%

This figure would be likely to decrease in future years as a result of ploughing back profits by way of retained earnings that are increasing the equity. On conversion the gearing percentage must fall quite significantly. This would be affected by means of the retained earnings new loans taken out and old loans paid off.

The completely diluted earnings per share that is where all the holders convert would be

Earnings $4340 as per scheme (i)

EPS  4340/7000 shares= 62c per share

For the period in which the holders can't or don't convert the undiluted EPS (provided earnings remain at this level and tax rates don't change) is much greater at 83c per share as indicated above. If and when the holders exchange a dilution of earnings will take place and the control of the company may be affected. If the interest rate is set the company would appear to have locked in to quite a low rate compared with the 7½% debentures that convertibles have a low service cost. The gearing would be well on top of the current industry average but on conversion would fall well below it.

(iv) 7½% debentures

1698_Example to show the companys current gearing2.png

EPS =4089/5000= 82c per share

The EPS once more illustrates that using more debt that is becoming more highly geared can increase the earnings of the Ordinary Shareholders that is EPS 82c per share compared with current earnings of 60c per share. But the raise in gearing which would be higher than the industry average does place the increased risk of insolvency on the company. If trading circumstances are bad then the company still has to pay the interest on the debentures.


Related Discussions:- Example to show the companys current gearing

Explain cash flow budget and npv in lkl plc, LKL PLC Project VZ (...

LKL PLC Project VZ (a) Cash Flow budget and NPV WORKINGS

Give subject matter of participation, Q. Give subject matter of participati...

Q. Give subject matter of participation? Subject matter of participation by and large the workers interests in participation varies with the nature of issues' involved in parti

Explain the asset substitution effect, Question: a. Explain what the de...

Question: a. Explain what the debt overhang problem is (following the lines of Myers 1977) make sure that you specify what the relevant conflict of interest is and what are the

Define the wave of mergers in the banking industry, What is behind the wave...

What is behind the wave of mergers in the banking industry? A: Various economic factors have caused banking institutions to merge over the past various years. These factors inclu

How are financial trades made on an organized exchange, How are financial t...

How are financial trades made on an organized exchange? Every exchange-listed security is traded at a precise location on the trading floor called the post. The trading is mana

How a firm determines the optimal level of current assets, Explain how a fi...

Explain how a firm determines the optimal level of current assets. The best possible level of working capital is determined by finding the amount that balances the need for liq

Objectives of working capital management, What are the objectives of workin...

What are the objectives of working capital management? Briefly explain the various elements of operating cycle.

Define the term in brief -called-up share capital, Define the term in brief...

Define the term in brief -Called-up share capital Called-up share capital that you may find in some of balance sheets. It refers to that part of subscribed capital, which share

Analyse and interpret company financial statements, INSTRUCTIONS Downl...

INSTRUCTIONS Download the 2011 Annual Report for Marks and Spencer PLC, from the link provided on Study Space. Review the Annual Report, paying particular attention to the Fin

calculate the value of the bond, a.) A bond of Rs. 1000 value carries a co...

a.) A bond of Rs. 1000 value carries a coupon rate of 10% and has a maturity period of 6 years. Interest is payable semi-annually. If the required rate of return is 12%, calculate

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd