MCC Holidays Limited is a property company that owns holiday property in County A which it...
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MCC Holidays Limited is a property company that owns holiday property in County A which it rents on a five year term agreements to operators. This generates a fixed annual rental income for the company that is used to repay its debt capital, to distribute dividends to its shareholders and to accumulate reserves for future expansion. Despite the current problems that the tourist industry is experiencing during the current financial and economic crises, studies carried out by the company indicate that the luxury holiday sector of the industry is likely to remain intact or to suffer the least. Further more the study has indicated that this is the sector that is expected to recover much more quickly than the rest of the tourist sectors. The board of directors of MCC Holidays Limited had met to discuss the opportunity to create a resort responding to the needs of luxury holidays by developing a project. It was decided to develop an existing property which includes a four star hotel and the adjacent land property into a luxury five star resort. The development will include the re- innovation of the hotel and the construction of a luxury spa centre with a golf course. Finances Currently the Balance Sheet of MCC Holidays Limited shows the following MCC Holidays Limited Balance Sheet As at 31 December 2023 Land 1,500,000 2,500,000 Buildings (net book value) Cash and Short Term Deposits 250,000 10% 20 year Loan Stock (31.3.2031) 500,000 Net Assets €3,750,000 3m Ordinary Shares 3,000,000 Profit and Loss Reserve 750,000 €3,750,000 Equity € The project is estimated to cost €20m and MCC Holidays Limited board of directors has decided to adopt the strategy summarized in the business model, to raise the required funds to finance the development. Business Model The proposed business model involves the following steps: 1. To revalue the land which on the basis of the professional property valuation report that has been obtained, it will alter the company's balance sheet to the extend that the share capital will be reduced to 30% of the total value of equity from the 80% at which currently stands. 2. To proceed with a 2 for 1share bonus issue to be financed in full by using the revaluation reserve created through the revaluation of land (step 2 above). 3. Following step 2, the company will proceed on a 2 for 3 share issue at a premium of €1.25. 4. It is estimated that the new balance sheet structure, will enable the company to obtain a long-term loan from the European Investment Bank of €6.5m at an annual interest rate of 4.5% which is required to raise the total of €20m to finance the project. If the procedure is followed on a timely basis it is expected that the project will be completed within a period of one year which will allow for the opening on 1 April 2025. Questions: Question 1 Prepare the step by step equity structure of MCC Holidays Limited, indicating at every step the amount of cash in flow generated for the company. Question 2 Given the final equity structure of MCC Holidays Limited, comment on its ability to borrow the proposed long term €6.5m loan from the European Investment Bank. Question 3 Do you believe that this is a realistic business model? Would you suggest any alternative strategy to the board of directors? MCC Holidays Limited is a property company that owns holiday property in County A which it rents on a five year term agreements to operators. This generates a fixed annual rental income for the company that is used to repay its debt capital, to distribute dividends to its shareholders and to accumulate reserves for future expansion. Despite the current problems that the tourist industry is experiencing during the current financial and economic crises, studies carried out by the company indicate that the luxury holiday sector of the industry is likely to remain intact or to suffer the least. Further more the study has indicated that this is the sector that is expected to recover much more quickly than the rest of the tourist sectors. The board of directors of MCC Holidays Limited had met to discuss the opportunity to create a resort responding to the needs of luxury holidays by developing a project. It was decided to develop an existing property which includes a four star hotel and the adjacent land property into a luxury five star resort. The development will include the re- innovation of the hotel and the construction of a luxury spa centre with a golf course. Finances Currently the Balance Sheet of MCC Holidays Limited shows the following MCC Holidays Limited Balance Sheet As at 31 December 2023 Land 1,500,000 2,500,000 Buildings (net book value) Cash and Short Term Deposits 250,000 10% 20 year Loan Stock (31.3.2031) 500,000 Net Assets €3,750,000 3m Ordinary Shares 3,000,000 Profit and Loss Reserve 750,000 €3,750,000 Equity € The project is estimated to cost €20m and MCC Holidays Limited board of directors has decided to adopt the strategy summarized in the business model, to raise the required funds to finance the development. Business Model The proposed business model involves the following steps: 1. To revalue the land which on the basis of the professional property valuation report that has been obtained, it will alter the company's balance sheet to the extend that the share capital will be reduced to 30% of the total value of equity from the 80% at which currently stands. 2. To proceed with a 2 for 1share bonus issue to be financed in full by using the revaluation reserve created through the revaluation of land (step 2 above). 3. Following step 2, the company will proceed on a 2 for 3 share issue at a premium of €1.25. 4. It is estimated that the new balance sheet structure, will enable the company to obtain a long-term loan from the European Investment Bank of €6.5m at an annual interest rate of 4.5% which is required to raise the total of €20m to finance the project. If the procedure is followed on a timely basis it is expected that the project will be completed within a period of one year which will allow for the opening on 1 April 2025. Questions: Question 1 Prepare the step by step equity structure of MCC Holidays Limited, indicating at every step the amount of cash in flow generated for the company. Question 2 Given the final equity structure of MCC Holidays Limited, comment on its ability to borrow the proposed long term €6.5m loan from the European Investment Bank. Question 3 Do you believe that this is a realistic business model? Would you suggest any alternative strategy to the board of directors?
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Introduction To Federal Income Taxation In Canada
ISBN: 9781554965021
33rd Edition
Authors: Robert E. Beam, Stanley N. Laiken, James J. Barnett
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