The summarised Balance Sheet of Omicron Ltd at 31 December 2002 was as follows:
|
$0 |
| Fixed assets |
1900 |
| Net current assets |
1500 |
|
3400 |
| 10% debentures 2003/2004 |
400 |
|
3000 |
| Share capital and reserves |
|
| Ordinary shares of $1 |
1000 |
| 8% preference shares of $1 |
800 |
| Share Premium account |
180 |
| Profit and Loss Account |
1020 |
|
3000 |
On 1 January 2003 before any other transactions had taken place the following occurred.
1. Redemption of all the debentures at a premium of 5%.
2. Redemption of all the preference shares at $1.25 per share. The shares had originally been issued at $1.10 per share.
REQUIRED:
(a) A revised Balance Sheet at 1 January 2003 as it appeared after the redemption of the debentures and the preference shares.
Omicron Ltds profit before interest for the year ended 31 December 2002 was $600000. A dividend of $0.40 was paid on its ordinary shares for the year. The ordinary shares were quoted at $3.50 on 31 December 2002 and at $3.84 on 1 January 2003 after the redemption of the debentures and preference shares.
REQUIRED:
(b) Calculate the following ratios both at 31 December 2002 and on 1 January 2003 after the debentures and preference shares had been redeemed. Give your answers to two decimal places.
(i) Gearing
(ii) Dividend cover
(iii) Earnings per share (EPS)
(iv) Price earnings ratio (PER)
(v) Dividend yield
REQUIRED :
(c) Comment on the changes in the ratios you have calculated in (b) as a result of the transactions in (a).
In May 2003 the directors of Omicron Ltd plan to build an additional factory. This requires initial capital expenditure of $600000 and is expected to start producing revenue and be profitable in three years’ time. The directors are considering raising the additional funds for the project by one of the following methods.
1. The issue of 12% debentures 2006 at par.
2. A rights issue of ordinary shares at $4 per share.
3. An issue of ordinary shares to the public at $4 per share.
The present rate of ordinary dividend would be maintained on all the old and new shares for the foreseeable future.
REQUIRED:
(d) Discuss each of the methods of raising the capital, and state with reasons which method the directors should choose.