Memphis Co plans to raise $5m so it can expand its existing retail business. It can...

 

Transcribed Image Text:

Memphis Co plans to raise $5m so it can expand its existing retail business. It can raise the finance by either issuing 10% loan notes redeemable in 2023, of one new share for 4 existing shares. The current financial statements of Memphis Co are given below. Income statement for the last year Sales Cost of sales Gross profit Administration costs Profit before interest and tax Interest Profit before tax Taxation at 30% Profit after tax Dividends Retained earnings Statement of Financial Position (Balance sheet) extract Net non-current assets Net current assets 12% loan notes 2014 $'000 50,000 30,000 20,000 14,000 6,000 300 5,700 1,710 3,990 2,394 1,596 $'000 20,100 4,960 2,500 22,560 Net non-current assets Net current assets 12% loan notes 2014 Ordinary shares, par value 25c Retained profit 20,100 4,960 2,500 22,560 2,500 20,060 22,560 Due to expansion of business, it is expected that sales revenue will increase by 12% in the first year. Variable cost of sales is 85% of cost of sales. Administration costs will also increase by 5% due to new staff appointments as a result of expansion. Memphis Co has a policy of paying out 60% of its profit after tax as dividends and it has no overdraft from its bank. Required: (a) For each financing proposal, prepare the forecast income statement after one additional year of operation. (b) Evaluate the effects of each financing proposal on the following ratios: Financial gearing Operational gearing Interest cover Earnings per share (iv) Memphis Co plans to raise $5m so it can expand its existing retail business. It can raise the finance by either issuing 10% loan notes redeemable in 2023, of one new share for 4 existing shares. The current financial statements of Memphis Co are given below. Income statement for the last year Sales Cost of sales Gross profit Administration costs Profit before interest and tax Interest Profit before tax Taxation at 30% Profit after tax Dividends Retained earnings Statement of Financial Position (Balance sheet) extract Net non-current assets Net current assets 12% loan notes 2014 $'000 50,000 30,000 20,000 14,000 6,000 300 5,700 1,710 3,990 2,394 1,596 $'000 20,100 4,960 2,500 22,560 Net non-current assets Net current assets 12% loan notes 2014 Ordinary shares, par value 25c Retained profit 20,100 4,960 2,500 22,560 2,500 20,060 22,560 Due to expansion of business, it is expected that sales revenue will increase by 12% in the first year. Variable cost of sales is 85% of cost of sales. Administration costs will also increase by 5% due to new staff appointments as a result of expansion. Memphis Co has a policy of paying out 60% of its profit after tax as dividends and it has no overdraft from its bank. Required: (a) For each financing proposal, prepare the forecast income statement after one additional year of operation. (b) Evaluate the effects of each financing proposal on the following ratios: Financial gearing Operational gearing Interest cover Earnings per share (iv) Memphis Co plans to raise $5m so it can expand its existing retail business. It can raise the finance by either issuing 10% loan notes redeemable in 2023, of one new share for 4 existing shares. The current financial statements of Memphis Co are given below. Income statement for the last year Sales Cost of sales Gross profit Administration costs Profit before interest and tax Interest Profit before tax Taxation at 30% Profit after tax Dividends Retained earnings Statement of Financial Position (Balance sheet) extract Net non-current assets Net current assets 12% loan notes 2014 $'000 50,000 30,000 20,000 14,000 6,000 300 5,700 1,710 3,990 2,394 1,596 $'000 20,100 4,960 2,500 22,560 Net non-current assets Net current assets 12% loan notes 2014 Ordinary shares, par value 25c Retained profit 20,100 4,960 2,500 22,560 2,500 20,060 22,560 Due to expansion of business, it is expected that sales revenue will increase by 12% in the first year. Variable cost of sales is 85% of cost of sales. Administration costs will also increase by 5% due to new staff appointments as a result of expansion. Memphis Co has a policy of paying out 60% of its profit after tax as dividends and it has no overdraft from its bank. Required: (a) For each financing proposal, prepare the forecast income statement after one additional year of operation. (b) Evaluate the effects of each financing proposal on the following ratios: Financial gearing Operational gearing Interest cover Earnings per share (iv) Memphis Co plans to raise $5m so it can expand its existing retail business. It can raise the finance by either issuing 10% loan notes redeemable in 2023, of one new share for 4 existing shares. The current financial statements of Memphis Co are given below. Income statement for the last year Sales Cost of sales Gross profit Administration costs Profit before interest and tax Interest Profit before tax Taxation at 30% Profit after tax Dividends Retained earnings Statement of Financial Position (Balance sheet) extract Net non-current assets Net current assets 12% loan notes 2014 $'000 50,000 30,000 20,000 14,000 6,000 300 5,700 1,710 3,990 2,394 1,596 $'000 20,100 4,960 2,500 22,560 Net non-current assets Net current assets 12% loan notes 2014 Ordinary shares, par value 25c Retained profit 20,100 4,960 2,500 22,560 2,500 20,060 22,560 Due to expansion of business, it is expected that sales revenue will increase by 12% in the first year. Variable cost of sales is 85% of cost of sales. Administration costs will also increase by 5% due to new staff appointments as a result of expansion. Memphis Co has a policy of paying out 60% of its profit after tax as dividends and it has no overdraft from its bank. Required: (a) For each financing proposal, prepare the forecast income statement after one additional year of operation. (b) Evaluate the effects of each financing proposal on the following ratios: Financial gearing Operational gearing Interest cover Earnings per share (iv)

Answer rating: 100% (QA)

Based on the financial information provided Memphis Co is considering raising 5 million to expand its retail business either by issuing 10 loan notes redeemable in 2023 or by issuing one new share for ... View the full answer