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Alpha, a public listed corporation, is considering how it should raise $10m of finance which is required for a major and vital non-current asset renewal scheme that will be undertaken during the current year to 31 December 20X6. Alpha is particularly concerned about how analysts are likely to react to its financial statements for the year to 31 December 20X6. Present forecasts suggest that Alpha's earnings per share and its financial gearing ratios may be worse than market expectations. Mr Wong, Alpha's Finance Director, is in favour of raising the finance by issuing a convertible loan. He has suggested that the coupon (interest) rate on the loan should be 5%; this is below the current market rate of 9% for this type of loan. In order to make the stock attractive to investors the terms of conversion into equity would be very favourable to compensate for the low interest rate.
Required
Problem (i) Discuss why the Finance Director believes the above scheme may favourably improve Alpha's earnings per share and gearing.
Problem (ii) Describe how the requirements of IAS 33 Earnings per share and IAS 32 Financial instruments: presentation are intended to prevent the above effects
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