Question 1 (24)1.1 Calculate liquidity and working capital ratios from the accounts of a...

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Question 1 (24)1.1 Calculate liquidity and working capital ratios from the accounts of a manufacturer of products for the construction industry, and comment on the ratios, (14) 	 		 			 			 			 			 		 		 			 			 			 		 		 			 			 		 		 			 		 	     	 		 			 			2011 			2010 			$million 		 		 			Revenue 			2 065.0 			1 788.7 			 		 		 			Cost of sales 			1478.6 			1304.0 			 		 		 			Gross profit 			586.4 			484.7 			 		 		 			Current assets 			572.3 			523,2 			 		 		 			inventory 			119,0 			109,0 			 		 		 			Receivables (note 1) 			400,9 			347,4 			 		 		 			Cash at bank and in hand 			52,4 			66,8 			 		 		 			Creditors falling due within one year 			501,0 			420,3 			 		 		 			Bank overdraft 			49,1 			35,3 			 		 		 			Taxes 			62,0 			46,7 			 		 		 			Payables (note 2) 			389.9 			338,3 			 		 		 			Net Current Assets 			71,3 			102,9 			 		 	     	 		 			Notes  			 				Trade receivables 				Trade payables 			 			 			329,8236,2 			285,4210,8 		 	  1.2 Seagull can achieve a profit after tax of 20% on the capital employed. At present its capital structure is as follows; XXXXXXXXXXordinary shares of $1 each $200 000Retained earnings 100 000300 000The directors propose to raise an additional $ XXXXXXXXXXfrom a rights issue. The current share market price is $1, 80.1.2.1 Calculate the number of shares that must be issued if the rights price is $1,60 $1,50 $1,40 $1,20. (4)1.2.2 Calculate the dilution in earnings per share in each case. (4)1.2.3 Calculate the price where the rights price is equal to capital employed/share. (2 )Question 2 (20)An entity has the following information in its balance sheet:   	 		 			 			$'000 		 		 			Ordinary shares of 50 cents 			2 			500 		 		 			8% preference shares of $1 each 			1 			500 		 		 			12% unsecured bonds 			1 			000 		 	  The ordinary shares are currently quoted at 130c each, the bonds are trading at $72 per $100 nominal and the preference shares at 52c each. The ordinary dividend of 15c has just been paid with an expected growth rate of 10%. Corporation tax is currently 30%.Calculate the weighted average cost of capital for this entity.

Robert · Accepted Answer

Solution 1 
1.1 
Current Ratio = Current Assets / Current liabilities 
2011 = 572.3/501 = 1.1423 
2010 = 523.2/420.3 = 1.2448 
Quick ratio = Current assets – inventory / Current liabilities 
2011 = 572.3 - 119/501 = 0.9048 
2010 = 523.2 - 109/420.3 = 0.9855 
Working capital = Current assets – Current liabilities 
2011 = 572.3-501 = 71.3 
2010 = 523.2-420.3 = 102.9 
1.2 
Funds raised = 126000 
No of shared issued = Funds raised / Rights price 
New EPS = Earnings / No. of shares 
No of shares = 200000+new shares 
Capital Employed = 200000 
Right price = capital employed/ share = 200000/200000 = 1 
Price Shares New EPS 
1.6 78750 0.358744395 
1.5 84000 0.352112676 
1.4 90000 0.344827586 
1.2 105000 0.327868852
Solution 2 
Security Value Face value Cost of capital 
Ordinary Shares  $  2,500,000.00  0.5 10% 
Preference shares  $  1,500,000.00  1 8% 
Bonds  $  1,000,000.00  1000 12%
After tax cost of capital for bonds = 12*(1-30%) = 8.4% 
WACC = (2.5 * 10 + 1.5*8 + 1*8.4)/ (2.5+1.5+1) 
= 9.08%
Solution 3 
Current EBIT = 21 million 
New EBIT = 21+5 = 26 million 
Investment = 25 million 
Borrow at 8%:

2011	2010	$million
Revenue	2 065.0	1 788.7
Cost of sales	1478.6	1304.0
Gross profit	586.4	484.7
Current assets	572.3	523,2
inventory	119,0	109,0
Receivables (note 1)	400,9	347,4
Cash at bank and in hand	52,4	66,8
Creditors falling due within one year	501,0	420,3
Bank overdraft	49,1	35,3
Taxes	62,0	46,7
Payables (note 2)	389.9	338,3
Net Current Assets	71,3	102,9

$'000
Ordinary shares of 50 cents	2	500
8% preference shares of $1 each	1	500
12% unsecured bonds	1	000

Question 1 (24) 1.1 Calculate liquidity and working capital ratios from the accounts of a manufacturer of products for the construction industry, and comment on the ratios, (14) 2011 2010 $million...

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