Reference no: EM131165414

Bedok Limited is listed on the mainboard of the Singapore Exchange and is recognised as an established property development and construction company with a broad portfolio of residential, commercial, industrial, retail and mixed-use developments.

Bedok’s share price is currently trading at $0.85 and its beta (levered) is 1.2. The current yield on government bonds is 3% and it is estimated that the market risk premium is 5.5%. The corporate tax rate is 17%.

The firm continues to progress and evolve as a property development and construction group, building on its strengths and experience. This includes a move towards acquisitions and new projects beyond the shores of Singapore, as well as a more varied portfolio of developments at home, which now include integrated developments in key locations.

Based on the notes to the latest financial statements, you noted the following information:

Segment Information

For the year ended 31 December 2015

	Building construction	Property development	Property investment
	$'000	$'000	$'000
Revenue	365,539	506,704	6,553
Operating profit before interest and tax	60,612	123,996	4,235
Assets	147,256	1,228,253	249,328
Liabilities	145,782	713,503	132,905
Capital expenditure	1,061	0	248,525

· Building construction: General builders and construction contractors, general engineering and sale of construction materials.

· Property development: Development of residential, industrial and commercial projects.

· Property investment: Leasing of investment properties for rental income.

The firm’s borrowings amounted $270 million and its weighted average effective interest rate is 4.4%. The number of outstanding ordinary shares is 1,000 million.

Management is considering the acquisition of a portfolio of five investment-grade neighbourhood shopping centres in Australia valued at $150 million. This acquisition represents their entry into the Australian shopping center market. With Woolworths Supermarkets as the anchor tenant in each of the five shopping centres, they believe that this is a strategic acquisition, which will further enhance the quality, diversity and income profile of its property investment portfolio

Bedok anticipates that its needs to incur approximately $1.4 million on plant and equipment with useful life of five years to support its building construction and property development divisions. In order not to deplete its cash reserve, management is considering whether or not to enter into a lease with its equipment vendor based on the following terms:
• Lease term is four years.
• Installment payment of $33,000 per month.
• The implied interest rate is 6% per annum.
• Bedok has the option to purchase the equipment for $100 at the end of the lease term.

There are plans to commence an integrated development located in the west of Singapore. Codename Pioneer Lifestyle, it will be Bedok's first mixed-use development in Singapore. It is also Singapore's first mixed-use development in the west to integrate residential living with a retail mall, bus interchange as well as both MRT and LRT stations.

Pioneer Lifestyle development is worth about $350 million and 10% are estimated to be collected in the second year when marketing efforts are underway. The balance will be collected evenly in years 3 and 4.

The cost of development is expected to be 70% of the development value and cash flows are anticipated to be 10% (initial for the purchase of land), 40% (year 1), 35% (year 2), 10% (year 3) and 5% (year 4).

From an accounting perspective, revenue and cost will be recognised evenly over the development period of 4 years. Tax is computed on this basis.

As management is bullish on the increasing popularity of integrated developments in Singapore, they plan to fund this project using a term loan of $125 million. The entire amount will be drawn down at the onset and the loan will be paid off in full at the end of the project. The firm's bankers have indicated that they are able to match Bedok's current weighted average effective interest rate.

One of Bedok's acquisition strategies is to identify and purchase undervalued companies in different sectors. A recent acquisition was Woodlands Pte Ltd, a local based company in leasing, servicing and maintaining of construction industrial equipment.

You have been appointed by Bedok as an independent financial consultant to advise on several matters.

Question 1

The Board would like to fund the acquisition of the Australian property via a three-for-ten rights issue. DBS, their investment banker has indicated that their underwriting fees for a rights issue will be 3% of gross proceeds.

Analyse the rights issue by computing the following:
(a) The number of new shares will be issued.
(b) The subscription price per share.
(c) The ex-rights share price.
(d) The value of each right.

Question 2
(a) Determine whether the equipment lease is an operating or finance lease, stating your reasons.
(b) Describe the accounting treatment and financial implication in Bedok's accounts under both types of leases.

Question 3
Analyse Pioneer Lifestyle development by calculating the adjusted present value (APV). You are required to show all relevant workings. Ignore bankruptcy costs.