1. Summer Ltd has recently purchased Spring Ltd for $30 million. The business requires an immediate injection of $15 million to meet its needs and Summer Ltd has insisted that this be raised by 5% bank loan. SummerLtd intends to float SpringLtd in three years' time to exit from the investment and then expects to receive $50 million on the sale of its shares. During the next three years, the cash flows generated by Spring Ltd (after interest has been paid) will be used to eliminate the outstanding loan.

The net cash flows (before interest) of the business, over the three years leading up to the flotation, are predicted to be as follows:

Year 1	Year 2	Year 3
$m	$m	$m
2.5	4	5

Required:

(a) Calculate the amount of loan outstanding (if any) at the end of Year 3 by completing the following table.

2.Charles Ltd has 2 million shares in issue and surplus cash of $8 million, which is available to distributed to shareholders. Following this distribution, earnings are expected to be $2 million per year and the P/E ratio is expected to be 7 times. The firm offers two options of distributions.

(1) A dividend of $4.00 per share or

(2) A share buyback offer of 400,000 shares at $20 per share (hint: under this offer you can either hold and sell your shares)

If you have 200 shares, which option you would choose. Using calculation to support your argument.

Answer rating: 100% (QA)

1 Summer Ltd and Spring Ltd I can help you calculate the amount of loan outstanding for Summer Ltd Heres what you need to do Step 1 Set up the table C... View the full answer