Question 2: Baharom Bhd is a company listed on the Bursa Malaysia. Its board of directors...

  

Transcribed Image Text:

Question 2: Baharom Bhd is a company listed on the Bursa Malaysia. Its board of directors are concemed about its current level of debt finance. At the recent board meeting, it was suggested that plans should be initiated for the company to raise funds to reduce its current levels of debt. The recommendations put forth by the company's finance director includes pricing the rights issue at a 20% discount to its current ex-dividend share price, which is $7.50 per share and Baharom Bhd plans to raise $90 million. The board believes that paying off some of its debt will not affect its price/earnings ratio, which is expected to remain constant. Statement of profit or loss information Revenue Cost of sales Profit before interest and tax Interest Profit before tax Tax Profit after tax Equity Ordinary shares ($1 nominal) Reserves $m 472 423 Long-term liabilities 8% bonds ($100 nominal) 49 10 329 Statement of financial position information 27 $m 60 80 140 125 265 The 8% bonds are currently trading at $112.50 per $100 bond and bondholders have agreed that they will allow Baharom Bhd to purchase back the bonds at this market value. Baharom Bhd pays tax at a rate of 30% per year. Required: (a) Using the information provided calculate the theoretical ex rights price per share of Baharom Bhd following the rights issue. (5 marks) (b) Based on the assumption that the current price/earnings ratio will remain constant, discuss (showing the appropriate calculations) if this recommendation of using the funds raised to purchase back the bonds is financially acceptable to the company's shareholders. (10 marks) (c) Compare and contrast the financial objectives of a company listed on the stock exchange such as Baharom Bhd and the financial objectives of a not-for-profit organisation such as a large charity. (5 marks) Question 2: Baharom Bhd is a company listed on the Bursa Malaysia. Its board of directors are concemed about its current level of debt finance. At the recent board meeting, it was suggested that plans should be initiated for the company to raise funds to reduce its current levels of debt. The recommendations put forth by the company's finance director includes pricing the rights issue at a 20% discount to its current ex-dividend share price, which is $7.50 per share and Baharom Bhd plans to raise $90 million. The board believes that paying off some of its debt will not affect its price/earnings ratio, which is expected to remain constant. Statement of profit or loss information Revenue Cost of sales Profit before interest and tax Interest Profit before tax Tax Profit after tax Equity Ordinary shares ($1 nominal) Reserves $m 472 423 Long-term liabilities 8% bonds ($100 nominal) 49 10 329 Statement of financial position information 27 $m 60 80 140 125 265 The 8% bonds are currently trading at $112.50 per $100 bond and bondholders have agreed that they will allow Baharom Bhd to purchase back the bonds at this market value. Baharom Bhd pays tax at a rate of 30% per year. Required: (a) Using the information provided calculate the theoretical ex rights price per share of Baharom Bhd following the rights issue. (5 marks) (b) Based on the assumption that the current price/earnings ratio will remain constant, discuss (showing the appropriate calculations) if this recommendation of using the funds raised to purchase back the bonds is financially acceptable to the company's shareholders. (10 marks) (c) Compare and contrast the financial objectives of a company listed on the stock exchange such as Baharom Bhd and the financial objectives of a not-for-profit organisation such as a large charity. (5 marks)

Answer rating: 100% (QA)

a Theoretical ExRight Price Per share of Baharom Bhd current price Existing Ordinary Shares Rights I... View the full answer