Preeempkamaka is in operations of Mteremuko project for a decade now. It plans to increase revenue of the project by 20% per annum for the coming two years. For such an increase there are two options, either a rights issue or new debt finance.
Given the following statements
Statement of Profit or Loss and Other Comprehensive Income the Year Ended 30th December 2015
Revenue
81,000,000
Direct Costs
(45,000,000)
Depreciation
(5,700,000)
Indirect costs
(12,000,000)
Interest payable
(1,500,000)
Profit before tax
16,200,000
Tax on profit at 28%
(4,536,000)
Profit after tax
11,664,000
Dividend declared
6,998,000
Statement of Financial Position as at 30th December 2015
Noncurrent assets (NBV)
70,200,000
Current assets
Inventory
10,500,000
Receivables
14,700,000
Cash at bank
3,150,000
98,550,000
Capital and Reserves
Ordinary shares (TZS 1 nominal value)
15,000,000
Reserves
48,652,000
Non-current liabilities
10% debentures 2020 15,000,000
15,000,000
Current liabilities
Payables
Dividend payable
12,900,000
6,998,000
98,550,000
The proposed financing alternatives are as follows:
A 1 for 5 rights issue at TZS 10 per share
A TZS 15,000,000 term loan at 16% interest
Other relevant information is as follows
Direct costs increase up to 16% per annum is expected
The increase in the business will require increased inventory of TZS 10,000,000
Depreciation on non-current assets existing at 30 December 2015 is forecast to be TZS 5,700,000 per annum and it is forecast that TZS 20,000,000 of new non-current assets will be needed. This, together with new inventory, will be acquired in the year to 30th December 2016. Depreciation on these new assets will be 20% on a reducing balance basis starting in the year of purchase
The company pays tax at 30% per annum in the year in which the liability arises, and capital allowances are available at the same rate as depreciation.
Dividends are payable the year after they are declared. The company intends to maintain the existing pay-out ratio
The competitors of Preeempkamaka, Mwinuko Plc and Kibonde Plc are jointly initiating another project named pamoja project to compete with and the Mteremuko project. Below are the information available about the two companies.
MWINUKO PLC
KIBONDE PLC
Capital structure
Equity shares of TZS. 2
20,000
20,000
Reserves
30,000
100,000
50,000
120,000
10% Debt capital
70,000
0
120,000
120,000
Annual profit
Sales
80,000
90,000
Variable costs
30,000
70,000
Contribution
50,000
20,000
Fixed operating costs
40,000
10,000
Profit before interest and tax
10,000
10,000
Interest costs
7,000
0
Profit
3,000
10,000
Tax (20%)
600
2,000
Profit after tax (= earnings after interest and tax)
2,400
8,000
Assume that annual sales now increase for both companies by 50%.
REQUIRED
For the two financing alternatives being considered by the directors of the company, prepare forecast mteremuko projects
Income statement for the year to 30th December 2016 (2 marks)
Statement of financial position at 30th December 2016 (2 marks)
And for the two companies Mwinuko Plc and Kibonde Plc and the forecasted statements of mteremuko project, calculate and compare:
Earnings per share (1 mark)
Operating leverage (1 mark)
Financial leverage (1 mark)
The operational gearing ratio (1 mark)
The financial gearing ratio (1 mark)
The combined gearing effects (1 mark)
Answers
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I dont know sorry really
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