The directors of Edac pic are considering purchasing some or all of the company's preference shares (nominal value £1 per share) on the open market during the year ending 30 June 20X1.

Edac pic’s share premium account balance at purchase date will be £320,000.

Three completely independent scenarios are under consideration.

Scenario A

• 80,000 of the shares are to be bought back at a premium of 40p per share. There will be no accompanying new share issue.

• Legally distributable profits at buyback date are estimated to be £376,000.

• The preference shares had originally been issued at pan Scenario 8

• 120,000 of the shares are to be bought back at a premium of 25p per share. There will be no accompanying new share issue.

• Legally distributable profits at buyback date are estimated to be £205,900.

• The preference shares had originally been issued at I 15p per share.

Scenario C

• As Scenario B, except that partial financing is to be provided by an issue of 90,000 ordinary shares of £ I per share at I I Op per share.

(a) For each scenario A, B and C, calculate and identify the amounts which Edac pic would appropriate from distributable profits in connection with the buyback. Assume that the share premium account would be utilised to the full extent permitted under the Companies Act 1985.

(b) Assume now that Edac pic is a private limited company (Edac Ltd) and that it has distributable profits which are estimated at £15,000 (not £205,900). Recalculate the figures for scenario C as follows:

(i) Show the permissible capital payment.
(ii) Compare the nominal value of bought-back shares with the aggregate of the new share proceeds and the permissible capital payment. Show the surplus or deficit which arises from this.

(c) Say how Edac Ltd would be most likely to deal with the balance in (b)(ii).
Your answers should show your calculations and contain a brief written explanation.LO11-2