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.