Goodtimes Co is a listed company that plans to spend $5m on expanding its existing business....

  

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Goodtimes Co is a listed company that plans to spend $5m on expanding its existing business. It has been suggested that the money could be raised by issuing 8% bonds redeemable in ten years' time. Current financial information on Goodtimes Co is as follows. Income statement information for the last year Profit before interest and tax Interest Profit before tax Tax Profit for the period Statement of financial position for the last year Non-current assets Current assets Total assets Equity and liabilities Ordinary shares, par value $1 Retained earnings Total equity 10% bonds 6% preference shares, par value $1 Total non-current liabilities Current liabilities Total equity and liabilities $000 2,500 11,250 2,500 1,250 $000 3,500 (250) 3,250 (975) 2,275 $000 10,000 10,000 20,000 13,750 3,750 2,500 20,000 The expansion of business is expected to increase profit before interest and tax by 10% in the first year. An ordinary dividend of 17 cents per share has just been paid and dividends are expected to increase by 4% per year for the foreseeable future. Goodtimes Co has no overdraft and pays tax on profits at an annual rate of 30%. Financial gearing: 45% (prior charge capital divided by equity share capital on a book value basis) Interest coverage ratio: 12 times Required Evaluate and comment on the effects, after one year, of the bond issue and the expansion of business on the following ratios: (1) Interest coverage ratio. Financial gearing. (iii) Earnings per share. PROVE Goodtimes Co is a listed company that plans to spend $5m on expanding its existing business. It has been suggested that the money could be raised by issuing 8% bonds redeemable in ten years' time. Current financial information on Goodtimes Co is as follows. Income statement information for the last year Profit before interest and tax Interest Profit before tax Tax Profit for the period Statement of financial position for the last year Non-current assets Current assets Total assets Equity and liabilities Ordinary shares, par value $1 Retained earnings Total equity 10% bonds 6% preference shares, par value $1 Total non-current liabilities Current liabilities Total equity and liabilities $000 2,500 11,250 2,500 1,250 $000 3,500 (250) 3,250 (975) 2,275 $000 10,000 10,000 20,000 13,750 3,750 2,500 20,000 The expansion of business is expected to increase profit before interest and tax by 10% in the first year. An ordinary dividend of 17 cents per share has just been paid and dividends are expected to increase by 4% per year for the foreseeable future. Goodtimes Co has no overdraft and pays tax on profits at an annual rate of 30%. Financial gearing: 45% (prior charge capital divided by equity share capital on a book value basis) Interest coverage ratio: 12 times Required Evaluate and comment on the effects, after one year, of the bond issue and the expansion of business on the following ratios: (1) Interest coverage ratio. Financial gearing. (iii) Earnings per share. PROVE

Answer rating: 100% (QA)

i Interest coverage ratio The interest coverage ratio is a measure of a companys ability to make its ... View the full answer