Non
Stop
Limited
has grown rapidly during the past
three
years. The company
is considering
to
raise $50 million
in order
to finance the company’s operations as well as to
replace the
company’s short
–
term debts.
Currently, the company has 20 million of ordinary shares
outstanding. The company’s tax rate is 28%. The following are extracts of the company’s latest
financial statements:
Balance Sheet
Current liabilities
$30,000,000
Ordinary shares, par $1
$20,000,000
Retained earnings
$
10,00
0,000
Total assets
$
60,00
0,000
Total claims
$
60,00
0,000
Income Statement
Earnings before interest and taxes
$15,000,000
Interest
$
4,5
0
0
,000
Earnings before taxes
$10,500,000
Taxes (28%)
$
2,940
,
0
00
Net income
$
7,560
,
0
00
The company’s investment banker has assured the company that the following alternatives are
feasible (flotation costs will be ignored):
Alternative
1
:
Sell
ordinary shares
at
$
4
.
Alternative
2
:
Sell convertible bonds at an 8% coupon; immediately convertible into
200 ordinary shares for each $1,000
–
par
–
value bond
Alternative
3
:
Sell bonds at an 8% coupon, each $1,000
–
par
–
value bond carrying
200 warrants immediately exercisable into
ordinary share
s at 5 per share
at $5
per
share Based on the above information provided,
y
ou are required to answer the following questions:a)
Suppose the company will spend half of the funds raised to pay off the short
–
term
debts
and
the other
half to increase total assets. Construct the new
balanc
e sheet under each alternative
. For
Alternatives 2 and 3, show the
balance sheet
after conversion of the bo
nds or
exercise of the warrants
.ACTY 7290 Advanced Business Finance
Assignment
–
Semester
1, 2018
Page
6
b)
Assess the effect of capital raising on earnings per share of the company
under each alternative. Assume that earnings before interest and taxes
(EBIT) will be 25% of total assets
.
[
9
marks]
c
)
Assume that
Mr. Bill Ma
rks
own
ed
65% of the
company’s
ordinary shares.
Suppose
he did not purchase
the comp
any’s convertible bonds or bond with
warrant
s
.
Assess the effect of capital raising on
his
percentage ownership
under each alternative. W
hich alternative should
he
select?
Support your
answer with calculations and
discussion
.
[
1
7
marks]
d
)
What will be the
debt ratio (
t
otal liabil
ities
/
t
otal
a
ssets) under each
alternative?
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