Do all the questions:
Question 1 -
The capital structure of Electrolux as at the year ended 31 October 2005 was as follows:
6,000,000 ordinary shares of 50 cents $3,000,000
10% preference share of $1 each $ 200,000
300,000 deferred ordinary share of $1 each $ 300,000
12% convertible loan stock $ 250,000
The company has an executive share option scheme which gives the company's directors the option to purchase a total of 100,000 ordinary shares for $2.10 each. During the year ended 31 October 2006 no shares were issued in accordance with the share option scheme and the company's obligations under the scheme remained unchanged.
On 31 August 2006 Electrolux Co made a 1 for 6 rights issue at $2.50 per share. The cum-right price on the last day of quotation cum rights was $2.85 per share. The shares issued in the rights issue are not included in the figure for ordinary shares given above.
The deferred ordinary shares will not rank for dividends until 20 November 2010 when they will each be divided into two 50 cents ordinary shares ranking paripassuwith other ordinary shares then in issue.
The 12% convertible loan stock can be converted into ordinary shares on the following terms:
1. If the option is exercised on 1 November 2007 each $100 of loan stock can be converted into 40 ordinary shares
2. If the option is exercised on 1 November 2008 each $100 of loan stock can be converted into 35 ordinary shares
The following information comes from the statement of comprehensive income of the company for the year ended 31 October 2006:
Profit before interest and taxation $1,253,000
Less interest costs ($ 30,000 ) $1,223,000
Less income tax at 30% ( 366,900 )
Profit attributable to shareholders $ 856,100
You may assume that the yield on 2.5 % government consolidated stock was 7.5% on 1 November 2005 and 6% on 1 November 2006, and that the rate of income tax is 30% throughout.
Electrolux Co's reported earnings per share for the year ended 31 October 2005 was 10 cents.
Required:
(a) Compute Electrolux Co's basic earnings per share in cents for the year ended 31 October 2006.
(b) Compute Electrolux Co's restated earnings per share in cents for the year ended 31 October 2005.
(c) Compute Electrolux Co's fully diluted earnings per share in cents for the year ended 31 October 2006.
(d) Compute Electrolux Co's fully diluted earnings per shares in cents for the year ended 31 October 2005.
(e) Explain how an investor can evaluate the quality of the earnings per share a figures published in a company's financial statements.
Question 2 -
On 1 January 20x1, SAW leasing Ltd leased a piece of machinery to SEE Manufacturing Ltd. The terms of the lease agreement included: (i) a non-cancellable lease term of four years with no renewal or purchase option, and (ii) a lease rental of $10,000 per year plus executory costs of $1,000 per year to be paid by SEE Manufacturing Ltd on 31 December each year, commencing 31 December 20x1.
The lease rental (after taking into account residual value of $7,000 at the end of the lease, which is not guaranteed by any party) was determined based on a 10% rate of return to SAW Leasing Ltd. The machinery is new on 1 January 20x1 and is expected to have an estimated useful life of five years. At the end of the lease term, the machinery is to be returned to SAW Leasing Ltd.
Required:
(a) Differentiate whether this is a finance lease.
(b) In the books of lessor, compute the gross investment in the lease and its present value.
(c) Prepare a lease amortization schedule for the four years commencing January 20x1 to 31 December 20x4.
(d) Illustrate the journal entries in the book of the lessor (SAW Leasing Ltd) for the four years commencing January 20x1 to 31 December 20x4. Include the date and explanation for each entry.
(e) What common possible variations to the lease terms can be made? Narrate briefly any two such variations.
Question 3 -
The following information has been extracted from the recently published account of DG. Extracts from the income statement:
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20x9 $
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20x8 $
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Sales
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11,200
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9,750
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Cost of sales
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8,460
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6,825
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Net profit before tax
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465
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320
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This is after charging:
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Depreciation
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360
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280
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Debenture interest
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80
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60
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Interest on bank overdraft
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15
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9
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Audit fees
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12
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10
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Balance Sheets as at 30 April
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20x9
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20x8
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$'000
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$'000
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$'000
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Assets
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Non-current assets
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1,850
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1,430
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Current assets
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Inventory
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640
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490
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A/C Receivables
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1,230
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1,080
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Cash
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80
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1,950
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120
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Total assets
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3,800
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3,120
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Equity and liabilities
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Capital and reserves
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Ordinary share capital
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800
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800
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Reserves
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1,245
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2,045
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875
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Non-current liabilities
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10% debentures
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800
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600
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Current liabilities
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Bank overdraft
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110
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80
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A/C Payables
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750
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690
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Taxation payable
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30
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20
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Dividends payable
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65
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955
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55
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845
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Total equity and liabilities
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3,800
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3,120
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The following ratios are those calculated for DG, based on its published accounts for the previous year, and also the latest industry average ratios: DG
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Industry
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30 April 20x8
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average
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Return on capital employed
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16.70%
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18.50%
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Net Profit /sales
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3.90%
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4.73%
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Gross profit margin
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30.00%
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35.23%
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Asset turnover (times)
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3.13
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3.91
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Current ratio
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2.00
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1.90
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Quick ratio
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1.42
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1.27
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Account receivable collection period
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40 days
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52 days
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Account payable collection period
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37 days
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49 days
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Inventory turnover- times
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13.90
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18.30
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Gearing
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26.37%
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32.71%
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Question 4 -
Singapore Tobacco Company has an outstanding issue of 8% convertible bonds that matures in 2018. Suppose the bonds are dated 1 October 2010, and pay coupon interest each 1 April and 1 October.
Bond Data:
Maturity (face) value is $100,000
Stated coupon interest rate 8%
Interest rate paid is 4% semi-annually $4,000
Market interest rate at the time of issue 9% annually, 4.5 % semi-annually
Issued price 93.5 cents
Required:
(a) Complete the following effective-interest amortization table from 1 October 2010 to 1 October 2012.
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A
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B
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C
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D
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E
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Interest interval
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Interest payment
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Interest expenses
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Discount amortization
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Unamortized Discount
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Bond carrying amount
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1-10-2010
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1-4-2011
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1-10-2011
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1-4-2012
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1-10-2012
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Attachment:- Assignment File.rar