Example to show the companys current gearing, Financial Management

Assignment Help:

Q. Example to show the companys current gearing?

The company's current gearing

2000/ 8500 × 100 = 23.53%

The current gearing position is on the low side particularly when compared with the industry average of 35%. This offers an indication that the company still has the scope and capacity to attract more debt. There is nevertheless a large secured bank overdraft, and it is quite likely that quite a high proportion of it represents hard-core debt. It is as well most unlikely that the bankers would call in such a large overdraft at short notice. If the overdraft were included in the gearing calculation, and treated as debt, the gearing ratio 38.1% is a little above the industry average.

Current earning per share ($000)

EPS    3, 000/5,000= 60c per share

(ii) Issue of ordinary shares

Number of new shares =5,000,000/2= 2,500,000 shares

189_Example to show the companys current gearing.png

EPS   4,340/7,500= 58c per share

Gearing   2,000/13,500× 100 = 14.81%

More equity would reduce the gearing further. The gearing in the future would as well tend to fall due to increases in reserves via retained earnings.

The scheme would decrease the EPS by 2c per share when compared with current earnings. Other considerations which must be looked at are

?? The control factor that is those shareholders who currently control the company could lose control unless they buy some of the shares being offered.

(iii) 5% convertible loan stock

262_Example to show the companys current gearing1.png

Undiluted EPS   4172/5000= 83c per share

The gearing at the time of issuing the convertible loan stock would be

7000/13500× 100 = 51.85%

This figure would be likely to decrease in future years as a result of ploughing back profits by way of retained earnings that are increasing the equity. On conversion the gearing percentage must fall quite significantly. This would be affected by means of the retained earnings new loans taken out and old loans paid off.

The completely diluted earnings per share that is where all the holders convert would be

Earnings $4340 as per scheme (i)

EPS  4340/7000 shares= 62c per share

For the period in which the holders can't or don't convert the undiluted EPS (provided earnings remain at this level and tax rates don't change) is much greater at 83c per share as indicated above. If and when the holders exchange a dilution of earnings will take place and the control of the company may be affected. If the interest rate is set the company would appear to have locked in to quite a low rate compared with the 7½% debentures that convertibles have a low service cost. The gearing would be well on top of the current industry average but on conversion would fall well below it.

(iv) 7½% debentures

1698_Example to show the companys current gearing2.png

EPS =4089/5000= 82c per share

The EPS once more illustrates that using more debt that is becoming more highly geared can increase the earnings of the Ordinary Shareholders that is EPS 82c per share compared with current earnings of 60c per share. But the raise in gearing which would be higher than the industry average does place the increased risk of insolvency on the company. If trading circumstances are bad then the company still has to pay the interest on the debentures.


Related Discussions:- Example to show the companys current gearing

Calculate the revenue - operating cost, Chrysler decides to avoid the probl...

Chrysler decides to avoid the problems associated with exporting autos to Japan by building a plant in Japan. The cost is expected to be $1 billion with $500 million to be spent no

Financial leverage, Financial Leverage In accounting and finance, ...

Financial Leverage In accounting and finance, the amount of long lasting debt that an organization has in relation to its equity the longer the ratio, the larger the lever

What is affiliated company, Q. What is Affiliated Company? Affiliated C...

Q. What is Affiliated Company? Affiliated Company - Company or other organization related through common ownership,common control of management or owners or through some other

What is the value of ast stock, Brandon Michael Chu of Henry Law & Yang Yi ...

Brandon Michael Chu of Henry Law & Yang Yi Capital Limited believes that earnings and dividends at Alua Amanova & Shuwen Wang Technologies (AST) will continue to grow at 12% per ye

Operating leverage, Operating Leverage Operating leverage define the de...

Operating Leverage Operating leverage define the degree to which an organization cost of operation is fixed as opposed to variable. Therefore, it is a measure of how much a fir

Explain about loans - forms of bank finance, Q. Explain about Loans - Forms...

Q. Explain about Loans - Forms of Bank Finance? When a bank makes an advance in lump-sum against some security it is called a loan. In Case of a loan, a specified amount is san

Assignmebt solution, Select a company (excluding finance sector) of Bursa M...

Select a company (excluding finance sector) of Bursa Malaysia (www.bursamalaysia.com). Analyse and comment on the liquidity and profitability performance of the selected company fr

Advantages to the investors, Advantages to the Investors: The warran...

Advantages to the Investors: The warrant acts as a sweetener and ensures a better subscription to the NCDs, especially for companies with good track record. NCDs with warran

Explain arbitrage risk free arguments, The current market value of any real...

The current market value of any real or financial assets is the present value of the cash flows accruing to that asset discounted by a market determined risk-adjusted required rate

Determine the earnings per share, Goodshape Company has currently, an ordin...

Goodshape Company has currently, an ordinary share capital of Rs. 2.5 million, consisting of 25,000 shares of Rs. 100 each. The management is planning to raise another Rs. 2 milli

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd