- 10 Marks
BCL – Nov 2024 – L1 – Q3b – Financial Assistance for Share Purchase
Conditions under which a company may provide financial assistance for share purchase.
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Question Tag: Capital structure
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+ past questions and counting.
- 20 Marks
FM – May 2017 – L3 – Q2 – Financing Decisions and Capital Markets
Calculate gearing ratio, rights issue impacts, and shareholder implications.
Question
LL Plc. is a large engineering company. Its ordinary shares are quoted on the Stock Exchange.
LL Plc.’s Board is concerned that the company’s gearing level is too high and that this is having a detrimental impact on its market capitalisation. As a result, the Board is considering a restructuring of LL Plc.’s long-term funds, details of which are shown here as at 28 February, 2017:
| Funding Source | Total Par Value (₦m) | Market Value |
|---|---|---|
| Ordinary Share Capital (50k) | 67.5 | ₦2.65/share ex-div |
| 7% Preference Share Capital (₦1) | 60.0 | ₦1.44/share ex-div |
| 4% Redeemable Debentures (₦100) | 45.0 | 90% ex-int |
The debentures are redeemable in 2022. LL Plc.’s earnings for the year to 28 February, 2017 were ₦32.4 million and are expected to remain at this level for the foreseeable future. Retained earnings, as at 28 February, 2017 were ₦73.2 million.
The Board is considering a 1 for 9 rights issue of ordinary shares, and this additional funding would be used to redeem 60% of LL Plc.’s redeemable debentures at par. However, some of LL Plc.’s directors are concerned that this issue of extra ordinary shares will cause the company’s ordinary share price and its earnings per share (EPS) to fall by an excessive amount, to the detriment of LL Plc.’s shareholders. Accordingly, they are arguing that the rights issue should be designed so that the EPS is not diluted by more than 5%.
The Directors wish to assume that the income tax rate will be 21% for the foreseeable future and the tax will be payable in the same year as the cash flows to which it relates.
Required:
a. i. Calculate LL Plc.’s gearing ratio using both book and market values. (5 Marks)
ii. Discuss, with reference to relevant theories, why LL Plc.’s Board might have concerns over the level of gearing and its impact on LL Plc.’s market capitalisation. (6 Marks)
b. Assuming that a 1 for 9 rights issue goes ahead, calculate the theoretical ex-rights price of LL Plc.’s ordinary share and the value of a right. (3 Marks)
c. Discuss the Directors’ view that the rights issue will cause the share price and the EPS to fall by an excessive amount, to the detriment of LL Plc.’s ordinary shareholders. Your discussion should be supported by relevant calculations. (6 Marks)
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- Tags: Capital structure, EPS, Rights Issue, Share Price
- Level: Level 3
- 8 Marks
CR – Nov 2021 – L3 – Q2a – Earnings Per Share (IAS 33)
Define earnings quality, explain its assessment, and list factors impacting it.
Question
a. Past surveys revealed that one of the most important financial indicators in evaluating ordinary shares is the expected changes in earnings per share (EPS). Corporate earnings are a key component of these financial indicators, and, as far as investors are concerned, the quality of earnings is important in measuring a company’s prospects. The quality of earnings can be affected by several factors, which are at the discretion of management. A simple or complex capital structure also plays a vital role in the assessment of earnings quality and EPS.
Required:
i. What does “quality of earnings” connote, and how can it be assessed?
(5 Marks)
ii. What are the factors that can affect the quality of earnings of an organisation?
(3 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: Capital structure, Earnings Quality, EPS, Financial Indicators
- Level: Level 3
- Topic: Earnings Per Share (IAS 33)
- 20 Marks
FM – Nov 2018 – L3 – Q4 – Strategic Performance Measurement
Evaluate Yemi John Plc’s financial performance and analyze financing options for expansion in line with shareholder wealth and earnings growth.
Question
Yemi John Plc. (YJ) is planning to raise N30 million in new finance for a major expansion of its existing business and is considering a rights issue, a placing, or an issue of bonds. The corporate objectives of YJ, as stated in its annual report, are to maximize the wealth of its shareholders and to achieve continuous growth in earnings per share. Recent financial information on YJ is as follows:
| Year | 2017 | 2016 | 2015 | 2014 |
|---|---|---|---|---|
| Turnover (Nm) | 28.0 | 24.0 | 19.1 | 16.8 |
| Earnings before interest and tax (EBIT) (Nm) | 9.8 | 8.5 | 7.5 | 6.8 |
| Profit after tax (PAT) (Nm) | 5.5 | 4.7 | 4.1 | 3.6 |
| Dividends (Nm) | 2.2 | 1.9 | 1.6 | 1.6 |
| Ordinary shares (Nm) | 5.5 | 5.5 | 5.5 | 5.5 |
| Reserves (Nm) | 13.7 | 10.4 | 7.6 | 5.1 |
| 8% Bonds, redeemable 2024 (Nm) | 20 | 20 | 20 | 20 |
| Share price (N) | 8.64 | 5.74 | 3.35 | 2.67 |
The par value of the shares of YJ is N1.00 per share. The general level of inflation has averaged 4% per year in the period under consideration. The bonds of YJ are currently trading at their par value of N100. The values for the business sector of YJ are as follows:
- Average return on capital employed: 25%
- Average return on shareholders’ fund: 20%
- Average interest coverage: 20 times
- Average debt/equity ratio (market value basis): 50%
- Return predicted by the capital asset pricing model: 14%
EBIT/closing total capital employed
Required:
a. Evaluate the financial performance of YJ, analyzing and discussing the extent to which the company has achieved its stated objectives of:
i. maximizing the wealth of its shareholders; and
ii. achieving continuous growth in earnings per share. (13 Marks)
Note: Up to 8 marks are available for financial analysis.
b. Analyze and discuss the relative merits of a rights issue, a placing, and an issue of bonds as ways of raising finance for the expansion. (7 Marks)
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- 1 Marks
FA – Nov 2020 – L1 – SA – Q9 – Elements of Financial Statements
Determines the balance on the share premium account after a rights issue.
Question
What will be the balance on the share premium account after the rights issue?
| Item | N’000 |
|---|---|
| Ordinary share capital: 200,000 shares of 50k each | 100 |
| Premium account | 150 |
The company made a rights issue of 1 for 5 at N1.50, and the rights issue was fully subscribed.
A. N90,000
B. N140,000
C. N150,000
D. N190,000
E. N200,000
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- Tags: Capital structure, Rights Issue, Share Premium
- Level: Level 1
- Topic: Elements of Financial Statements
- Series: NOV 2020
- 1 Marks
FA – Nov 2020 – L1 – SA – Q8 – Elements of Financial Statements
Determines the amount credited to share capital from a rights issue.
Question
The capital structure of Baba Oba Limited is shown below:
| Item | N’000 |
|---|---|
| Ordinary share capital: 200,000 shares of 50k each | 100 |
| Premium account | 150 |
The company made a rights issue of 1 for 5 at N1.50, and the rights issue was fully subscribed.
What is the amount of the rights issue credited to share capital?
A. N20,000
B. N40,000
C. N50,000
D. N70,000
E. N100,000
Find Related Questions by Tags, levels, etc.
- Tags: Capital structure, Rights Issue, Share Capital
- Level: Level 1
- Topic: Elements of Financial Statements
- Series: NOV 2020
- 20 Marks
BF – Nov 2015 – L1 – SB – Q2 – Basics of Business Finance and Financial Markets
Analyzing capital structure to compute estimated share values and recommend optimal structure.
Question
A firm has recently collected the following data in respect of its capital structure, expected earnings per share, and required rate of return.
| Debt Ratio % | Expected Earnings Per Share (N) | Required Rate of Return (%) |
|---|---|---|
| 0 | 3.10 | 14 |
| 10 | 3.80 | 16 |
| 20 | 4.60 | 17 |
| 30 | 5.25 | 19 |
| 40 | 5.70 | 20 |
| 50 | 5.00 | 22 |
| 60 | 4.50 | 24 |
You are required to:
a. Compute the estimated share values. (10 Marks)
b. Determine the optimal capital structure based on the maximization of expected earnings per share and the maximization of share values. (5 Marks)
c. Which capital structure criterion would you recommend and why? (5 Marks)
(Total: 20 Marks)
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- Tags: Capital structure, Earnings Per Share, Share Value
- Level: Level 1
- Topic: Basics of Business Finance and Financial Markets
- Series: NOV 2015
- 1 Marks
BMF – May 2017 – L1 – SA – Q16 – Basics of Business Finance and Financial Markets
Multiple-choice question on identifying a source that is not typical for long-term capital.
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- Tags: Capital structure, Financing, Long-term Capital
- Level: Level 1
- Topic: Basics of Business Finance and Financial Markets
- Series: MAY 2017
- 20 Marks
AFM – May 2016 – L3 – Q5 – Corporate Reconstruction and Reorganisation, Business reorganization
Calculate the maximum possible loss of the company and allocate it between preference and ordinary shareholders.
Question
Additional Information:
- The realizable values of the assets are as follows:
- Furniture & Fittings: GH¢27.0m
- Motor Vehicle: GH¢67.5m
- Land & Building: GH¢26.25m
- Stocks: GH¢10.95m
- Debtors: GH¢7.5m
- The stated capital of the company is made up as follows:
- 2,000,000 ordinary shares of no par value: GH¢67.5m
- 500,000 15% cumulative preference shares of no par value: GH¢30.0m
- The cost of winding up is estimated at GH¢21.3m.
- The bank overdraft and 18% debentures are secured by a floating charge on the company’s assets.
- The preference dividends and interest on debentures are two years in arrears. However, no provision has been made for these in the financial statement.
- The ordinary shareholders have decided to inject GH¢60.0m in consideration for a new issue of equity shares if the capital reconstruction scheme is accepted.
- Although it is the company’s policy to amortize intangible assets over five years, the Board of Directors has decided to maintain the Goodwill indefinitely in the books due to the persistent losses, in contravention of the company’s policy. Goodwill has been outstanding since 2009. The current financial state of the company negates the value and existence of the goodwill.
- The preference shareholders have indicated their willingness to bear any deficit resulting from the reconstruction in proportion to their interest in the stated capital. In return, their stake would be converted into equity, and they would be permitted to make nominations to key management positions, including chairing the board for the first five years. If these proposals are accepted, the preference shareholders will contribute further equity of GH¢60.0m. They have also agreed to waive 50% of the arrears of dividend and convert the rest into equity.
- Any arrears of preference dividends are to form a first charge upon any surplus on winding up.
- The original ordinary shareholders have decided to waive any dividend due to them during the first two years in order to put the company on sound financial ground.
- The company is expected to improve its cash flow position and commence dividend payments if the additional capital of GH¢120.0m is introduced.
Required:
a) Calculate the amount available if Crave Cottage Industry Limited is liquidated and its distribution.
(7 marks)
b) Calculate the maximum possible loss of Crave Cottage Industry Limited and its allocation to Preference Share Capital and Ordinary Share Capital. (6 marks)
c) Calculate the Bank/Cash balance of Crave Cottage Industry Limited after the reorganization. (2 marks)
d) Calculate the new stated capital for the company after the reorganization. (2 marks)
e) Prepare a Statement of Financial Position of Crave Cottage Industry Limited showing the position immediately after the scheme has been put in place.
(3 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Capital structure, Loss Allocation, Ordinary Shares, Preference shares, Shareholders
- Level: Level 3
- 4 Marks
AFM – May 2016 – L3 – Q2c – Sources of finance and cost of capital, Theories of capital structure
Calculate the cost of debt after tax for a discounted debenture issued by Brown Limited.
Question
c) Ten years ago, Brown Limited issued GH¢2.5 million of 6% discounted debentures at GH¢98 per 100 nominal. The debentures are redeemable in 5 years from now at GH¢2 premium over nominal value. They are currently quoted at GH¢80 per debenture ex-interest. Brown Limited pays corporate tax at the rate of 30%.
You are required to calculate the cost of debt after tax.
(4 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Capital structure, Cost of Debt, Debentures, Taxation
- Level: Level 3
- 10 Marks
BCL – Nov 2024 – L1 – Q3b – Financial Assistance for Share Purchase
Conditions under which a company may provide financial assistance for share purchase.
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- 20 Marks
FM – May 2017 – L3 – Q2 – Financing Decisions and Capital Markets
Calculate gearing ratio, rights issue impacts, and shareholder implications.
Question
LL Plc. is a large engineering company. Its ordinary shares are quoted on the Stock Exchange.
LL Plc.’s Board is concerned that the company’s gearing level is too high and that this is having a detrimental impact on its market capitalisation. As a result, the Board is considering a restructuring of LL Plc.’s long-term funds, details of which are shown here as at 28 February, 2017:
| Funding Source | Total Par Value (₦m) | Market Value |
|---|---|---|
| Ordinary Share Capital (50k) | 67.5 | ₦2.65/share ex-div |
| 7% Preference Share Capital (₦1) | 60.0 | ₦1.44/share ex-div |
| 4% Redeemable Debentures (₦100) | 45.0 | 90% ex-int |
The debentures are redeemable in 2022. LL Plc.’s earnings for the year to 28 February, 2017 were ₦32.4 million and are expected to remain at this level for the foreseeable future. Retained earnings, as at 28 February, 2017 were ₦73.2 million.
The Board is considering a 1 for 9 rights issue of ordinary shares, and this additional funding would be used to redeem 60% of LL Plc.’s redeemable debentures at par. However, some of LL Plc.’s directors are concerned that this issue of extra ordinary shares will cause the company’s ordinary share price and its earnings per share (EPS) to fall by an excessive amount, to the detriment of LL Plc.’s shareholders. Accordingly, they are arguing that the rights issue should be designed so that the EPS is not diluted by more than 5%.
The Directors wish to assume that the income tax rate will be 21% for the foreseeable future and the tax will be payable in the same year as the cash flows to which it relates.
Required:
a. i. Calculate LL Plc.’s gearing ratio using both book and market values. (5 Marks)
ii. Discuss, with reference to relevant theories, why LL Plc.’s Board might have concerns over the level of gearing and its impact on LL Plc.’s market capitalisation. (6 Marks)
b. Assuming that a 1 for 9 rights issue goes ahead, calculate the theoretical ex-rights price of LL Plc.’s ordinary share and the value of a right. (3 Marks)
c. Discuss the Directors’ view that the rights issue will cause the share price and the EPS to fall by an excessive amount, to the detriment of LL Plc.’s ordinary shareholders. Your discussion should be supported by relevant calculations. (6 Marks)
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- Tags: Capital structure, EPS, Rights Issue, Share Price
- Level: Level 3
- 8 Marks
CR – Nov 2021 – L3 – Q2a – Earnings Per Share (IAS 33)
Define earnings quality, explain its assessment, and list factors impacting it.
Question
a. Past surveys revealed that one of the most important financial indicators in evaluating ordinary shares is the expected changes in earnings per share (EPS). Corporate earnings are a key component of these financial indicators, and, as far as investors are concerned, the quality of earnings is important in measuring a company’s prospects. The quality of earnings can be affected by several factors, which are at the discretion of management. A simple or complex capital structure also plays a vital role in the assessment of earnings quality and EPS.
Required:
i. What does “quality of earnings” connote, and how can it be assessed?
(5 Marks)
ii. What are the factors that can affect the quality of earnings of an organisation?
(3 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: Capital structure, Earnings Quality, EPS, Financial Indicators
- Level: Level 3
- Topic: Earnings Per Share (IAS 33)
- 20 Marks
FM – Nov 2018 – L3 – Q4 – Strategic Performance Measurement
Evaluate Yemi John Plc’s financial performance and analyze financing options for expansion in line with shareholder wealth and earnings growth.
Question
Yemi John Plc. (YJ) is planning to raise N30 million in new finance for a major expansion of its existing business and is considering a rights issue, a placing, or an issue of bonds. The corporate objectives of YJ, as stated in its annual report, are to maximize the wealth of its shareholders and to achieve continuous growth in earnings per share. Recent financial information on YJ is as follows:
| Year | 2017 | 2016 | 2015 | 2014 |
|---|---|---|---|---|
| Turnover (Nm) | 28.0 | 24.0 | 19.1 | 16.8 |
| Earnings before interest and tax (EBIT) (Nm) | 9.8 | 8.5 | 7.5 | 6.8 |
| Profit after tax (PAT) (Nm) | 5.5 | 4.7 | 4.1 | 3.6 |
| Dividends (Nm) | 2.2 | 1.9 | 1.6 | 1.6 |
| Ordinary shares (Nm) | 5.5 | 5.5 | 5.5 | 5.5 |
| Reserves (Nm) | 13.7 | 10.4 | 7.6 | 5.1 |
| 8% Bonds, redeemable 2024 (Nm) | 20 | 20 | 20 | 20 |
| Share price (N) | 8.64 | 5.74 | 3.35 | 2.67 |
The par value of the shares of YJ is N1.00 per share. The general level of inflation has averaged 4% per year in the period under consideration. The bonds of YJ are currently trading at their par value of N100. The values for the business sector of YJ are as follows:
- Average return on capital employed: 25%
- Average return on shareholders’ fund: 20%
- Average interest coverage: 20 times
- Average debt/equity ratio (market value basis): 50%
- Return predicted by the capital asset pricing model: 14%
EBIT/closing total capital employed
Required:
a. Evaluate the financial performance of YJ, analyzing and discussing the extent to which the company has achieved its stated objectives of:
i. maximizing the wealth of its shareholders; and
ii. achieving continuous growth in earnings per share. (13 Marks)
Note: Up to 8 marks are available for financial analysis.
b. Analyze and discuss the relative merits of a rights issue, a placing, and an issue of bonds as ways of raising finance for the expansion. (7 Marks)
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- 1 Marks
FA – Nov 2020 – L1 – SA – Q9 – Elements of Financial Statements
Determines the balance on the share premium account after a rights issue.
Question
What will be the balance on the share premium account after the rights issue?
| Item | N’000 |
|---|---|
| Ordinary share capital: 200,000 shares of 50k each | 100 |
| Premium account | 150 |
The company made a rights issue of 1 for 5 at N1.50, and the rights issue was fully subscribed.
A. N90,000
B. N140,000
C. N150,000
D. N190,000
E. N200,000
Find Related Questions by Tags, levels, etc.
- Tags: Capital structure, Rights Issue, Share Premium
- Level: Level 1
- Topic: Elements of Financial Statements
- Series: NOV 2020
- 1 Marks
FA – Nov 2020 – L1 – SA – Q8 – Elements of Financial Statements
Determines the amount credited to share capital from a rights issue.
Question
The capital structure of Baba Oba Limited is shown below:
| Item | N’000 |
|---|---|
| Ordinary share capital: 200,000 shares of 50k each | 100 |
| Premium account | 150 |
The company made a rights issue of 1 for 5 at N1.50, and the rights issue was fully subscribed.
What is the amount of the rights issue credited to share capital?
A. N20,000
B. N40,000
C. N50,000
D. N70,000
E. N100,000
Find Related Questions by Tags, levels, etc.
- Tags: Capital structure, Rights Issue, Share Capital
- Level: Level 1
- Topic: Elements of Financial Statements
- Series: NOV 2020
- 20 Marks
BF – Nov 2015 – L1 – SB – Q2 – Basics of Business Finance and Financial Markets
Analyzing capital structure to compute estimated share values and recommend optimal structure.
Question
A firm has recently collected the following data in respect of its capital structure, expected earnings per share, and required rate of return.
| Debt Ratio % | Expected Earnings Per Share (N) | Required Rate of Return (%) |
|---|---|---|
| 0 | 3.10 | 14 |
| 10 | 3.80 | 16 |
| 20 | 4.60 | 17 |
| 30 | 5.25 | 19 |
| 40 | 5.70 | 20 |
| 50 | 5.00 | 22 |
| 60 | 4.50 | 24 |
You are required to:
a. Compute the estimated share values. (10 Marks)
b. Determine the optimal capital structure based on the maximization of expected earnings per share and the maximization of share values. (5 Marks)
c. Which capital structure criterion would you recommend and why? (5 Marks)
(Total: 20 Marks)
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- Tags: Capital structure, Earnings Per Share, Share Value
- Level: Level 1
- Topic: Basics of Business Finance and Financial Markets
- Series: NOV 2015
- 1 Marks
BMF – May 2017 – L1 – SA – Q16 – Basics of Business Finance and Financial Markets
Multiple-choice question on identifying a source that is not typical for long-term capital.
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- Tags: Capital structure, Financing, Long-term Capital
- Level: Level 1
- Topic: Basics of Business Finance and Financial Markets
- Series: MAY 2017
- 20 Marks
AFM – May 2016 – L3 – Q5 – Corporate Reconstruction and Reorganisation, Business reorganization
Calculate the maximum possible loss of the company and allocate it between preference and ordinary shareholders.
Question
Additional Information:
- The realizable values of the assets are as follows:
- Furniture & Fittings: GH¢27.0m
- Motor Vehicle: GH¢67.5m
- Land & Building: GH¢26.25m
- Stocks: GH¢10.95m
- Debtors: GH¢7.5m
- The stated capital of the company is made up as follows:
- 2,000,000 ordinary shares of no par value: GH¢67.5m
- 500,000 15% cumulative preference shares of no par value: GH¢30.0m
- The cost of winding up is estimated at GH¢21.3m.
- The bank overdraft and 18% debentures are secured by a floating charge on the company’s assets.
- The preference dividends and interest on debentures are two years in arrears. However, no provision has been made for these in the financial statement.
- The ordinary shareholders have decided to inject GH¢60.0m in consideration for a new issue of equity shares if the capital reconstruction scheme is accepted.
- Although it is the company’s policy to amortize intangible assets over five years, the Board of Directors has decided to maintain the Goodwill indefinitely in the books due to the persistent losses, in contravention of the company’s policy. Goodwill has been outstanding since 2009. The current financial state of the company negates the value and existence of the goodwill.
- The preference shareholders have indicated their willingness to bear any deficit resulting from the reconstruction in proportion to their interest in the stated capital. In return, their stake would be converted into equity, and they would be permitted to make nominations to key management positions, including chairing the board for the first five years. If these proposals are accepted, the preference shareholders will contribute further equity of GH¢60.0m. They have also agreed to waive 50% of the arrears of dividend and convert the rest into equity.
- Any arrears of preference dividends are to form a first charge upon any surplus on winding up.
- The original ordinary shareholders have decided to waive any dividend due to them during the first two years in order to put the company on sound financial ground.
- The company is expected to improve its cash flow position and commence dividend payments if the additional capital of GH¢120.0m is introduced.
Required:
a) Calculate the amount available if Crave Cottage Industry Limited is liquidated and its distribution.
(7 marks)
b) Calculate the maximum possible loss of Crave Cottage Industry Limited and its allocation to Preference Share Capital and Ordinary Share Capital. (6 marks)
c) Calculate the Bank/Cash balance of Crave Cottage Industry Limited after the reorganization. (2 marks)
d) Calculate the new stated capital for the company after the reorganization. (2 marks)
e) Prepare a Statement of Financial Position of Crave Cottage Industry Limited showing the position immediately after the scheme has been put in place.
(3 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Capital structure, Loss Allocation, Ordinary Shares, Preference shares, Shareholders
- Level: Level 3
- 4 Marks
AFM – May 2016 – L3 – Q2c – Sources of finance and cost of capital, Theories of capital structure
Calculate the cost of debt after tax for a discounted debenture issued by Brown Limited.
Question
c) Ten years ago, Brown Limited issued GH¢2.5 million of 6% discounted debentures at GH¢98 per 100 nominal. The debentures are redeemable in 5 years from now at GH¢2 premium over nominal value. They are currently quoted at GH¢80 per debenture ex-interest. Brown Limited pays corporate tax at the rate of 30%.
You are required to calculate the cost of debt after tax.
(4 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Capital structure, Cost of Debt, Debentures, Taxation
- Level: Level 3