Aragon (a bank) has recently received a request for a term loan from one of its customers, Valencia plc, a company listed on the Alternative Investment Market of the London Stock Exchange. Valencia plc's directors have requested a further £6 million (five-year floating rate) term loan at an initial interest rate of 12 per cent per annum, in order to purchase new equipment. The equipment will not materially change the company's current average percentage return on investment. Valencia plc's turnover increased by 9 per cent during the last financial year. Prior to receiving the request, the regional commercial manager of Aragon had conducted a review of Valencia plc's financial position, and had decided to ask Valencia plc's management to reduce the company overdraft by 25 per cent within the next six months.

Summarized financial statements for Valencia plc are as follows:

Extract information from the statement of profit and loss of Valencia plc
_______________________________________20X2
...........................................................£'000
Revenue...............................................99,360
Profit before interest and taxation.................10,760
Finance costs.........................................(3,840)
Profit before tax.......................................6,920
Income tax expense.................................(2,420)
Profit for the period..................................4,500
Dividend paid in the year.............................1100
The company's debentures are currently trading at £96.50 and equity 10p shares at £1.50. Comparative ratio information for Valencia plc's industry (averages)
____________________________20X2
Shore price...........................£51.20
Dividend yield........................2.5%
Dividend payout ratio................50%
Gross asset turnover.............1.4 times
Earnings per share.............17.8 pence
Gearing...............................52.4%
Acid test................................1 : 1
Interest cover.......................4 times
Return on revenue (PBIT) ............9 %
Return on investment...............16.5%
Required
a. You are a consultant for Aragon. You are required to produce a reasoned case explaining why the bank should request a 25 per cent reduction in the company's overdraft.
b. You are a consultant for Valencia plc:
i. Prepare a reasoned case to present to Aragon in support of the new term loan.
ii. Make recommendations to the board of Valencia plc in respect of how you think the company's financial position might be improved.
(Clearly state any assumptions made. All assumptions must relate to all parts of the question).

Transcribed Image Text:

Statements of financial position 20X2 £000 20X1 ASSETS Non-current assets Property, plant and equipment Current assets £000 16,06014,380 31,640 21,860 Trade receivables Investment Cash and cash equivalents 24,220 7,340 8,760 10,060 1,700 66,320 50,220 82,380 960 Total assets 64,600 EQUITY AND LIABILITIES Equity Share copital Retained earnings Total equity Non-current liabilities Long-term borrowings Debentures Total non-current liabilities Curront liabilitios Overdraft Trade and other payables Current taxation Total current liabilities Total liabilities Total equity and liabilities 3,800 16,900 20,700 3,800 13,500 17,300 6,000 16,000 22,000 16,000 16,000 16,340 13,220 20,920 2,420 2,800 39,680 31300 61,680 47,300 82,380 64,600 15,280