Question 1:
Relevant information from the balance sheet of Nikos plc, as at today's date, is as follows:
|
|
£m |
|
Ordinary shares of £0.25 each
|
33 |
|
11 % redeemable preference shares of £1 each
|
8 |
|
Share premium account
|
6 |
|
Revaluation reserve
|
5 |
|
Retained profits
|
12 |
|
9% debenture stock
|
15 |
The business's finance staff has estimated the costs of the individual elements of finance (after tax) as follows:
Ordinary shares 15
Preference shares 10
Debenture stock 6
Today's Stock Exchange quoted prices of the securities are as follows:
|
Ordinary shares
Preference shares
Debenture stock
|
0.61
1.20
98.00 (per £100 nominal)
|
Required:
What is the business's after-tax weighted average cost of capital? (Show all workings)
Question 2:
Chamberton plc is a Stock Exchange listed business, which wishes to raise £100 million to invest in a new project that is expected to generate operating profit of about £20 million each year. Three possible sources have been suggested:
i) a rights issue of ordinary shares at £2.50 per share;
ii) an issue of 10 % preference shares at par;
iii) an issue of 8% loan stock.
The most recent annual accounts of the business' can be sumrnarised as follows:
Profit and loss account
|
|
£m
|
|
Turnover
|
450
|
|
Operating profit
|
110
|
|
Interest
|
20
|
|
Profit before tax
|
90
|
|
Tax
|
|
|
|
60
|
|
Dividend
|
30
|
|
Retained profit
|
30
|
|
Balance sheet
|
|
|
|
£m
|
|
Fixed assets
|
240
|
|
Current assets
|
280
|
|
Current liabilities (including £60m overdraft)
|
180
|
|
|
100
|
|
|
340
|
|
12% debentures 2008
|
120
|
|
|
220
|
|
Ordinary shares of £0.50 each
|
50
|
|
Share premium
|
50
|
|
Revenue reserves
|
120
|
|
|
220
|
|
The shares are currently quoted at £3.50 each.
|
|
|
Required
|
|
(a) Outline the important features of each of the three proposed types of financing from the point of view of the existing shareholders.
(b) To the extent that you have the information, assess the suitability of the three proposed types of finance, in the business's circumstances. You should make clear what other information you would find useful in completing this assessment, and why you would find it useful.