Delta plc is a footwear manufacturer in Scotland who has just received a large contract from USA. The contract is expected to increase operating profits by 3.6m per annum. However, Delta plc is currently operating at full capacity and to fulfil the order an expansion of existing facilities will be required. To do so, the company will have to raise new finance of 16m and is currently considering the following options: an ordinary share issue at an issue price of 1 per share; or 16% unsecured loan stock. If ordinary shares are issued the dividend in 12 months time will rise by 20% else the dividend will remain unchanged.

A summary of the latest financial reports are shown below: Income Statement for year ended 30 June 2016

Turnover Operating Profit Interest Profit before Tax Tax Profit after Tax Ordinary dividend Retained Profit

000s 88,600 9,500 1,400 8,100 2,430 5,670 4,800 870

NOTES

Effective rate of corporation tax is 30%

Position Statement as at 30 June 2016 000s

Non-current Assets Current Assets Total Assets

Current Liabilities Non-Current Liabilities Total Liabilities

Net Assets

37,540 3,286 40,826

1,759 10,000 11,759 29,067

Includes an overdraft of 840,000 14% Debenture maturing in 5 years

UL17/1046

Page 5 of 6

UL17/1046

Equity

Share Capital Retained Earnings Share Premium Total Equity

Required:

8,000 Ordinary shares have a par value of 25p 9,307 11,760 29,067

a) Briefly describe the difference between the primary and secondary markets. (8 marks)

b) Prepare a forecast of the Income Statement for Delta plc for the year ending 30 June 2017, under each of the proposed financing methods.

(6 marks)

c) Calculate the EPS, gearing ratio and interest cover for each financing option for the year ending 30 June 2016.

(9 marks)

d) Advise the company on which financing source, if any, they should use.

Delta plc is a footwear manufacturer in Scotland who has just received a large contract from USA. The contract is expected to increase operating profits by 3.6m per annum. However, Delta plc is currently operating at full capacity and to fulfil the order an expansion of existing facilities will be required. To do so the company will have to raise new finance of 16m and is currently considering the following options: an ordinary share issue at an issue price of 1 per share or 16% unsecured loan stock. If ordinary shares are issued the dividend in 12 months' time will rise by 20% else the dividend will remain unchanged A summary of the latest financial reports are shown below: Tumover Operating Profit Interest Profit before Tax Tax Profit after Tax Ordinary dividend Retained Profit 000s 88.600 9,500 1400 8,100 2430 5,670 4,800 870 Effective rate of corporation tax is 30% Non-current Assets Current Assets Total Assets 000s 37,540 3.286 40,826 Current Liabilities Non-Curent Liabilities Total Liabilities Net As sets 1,759 10,000 11.759 29.067 Includes an overdraft of 840,000 14% Debenture maturing in 5 years Delta plc is a footwear manufacturer in Scotland who has just received a large contract from USA. The contract is expected to increase operating profits by 3.6m per annum. However, Delta plc is currently operating at full capacity and to fulfil the order an expansion of existing facilities will be required. To do so the company will have to raise new finance of 16m and is currently considering the following options: an ordinary share issue at an issue price of 1 per share or 16% unsecured loan stock. If ordinary shares are issued the dividend in 12 months' time will rise by 20% else the dividend will remain unchanged A summary of the latest financial reports are shown below: Tumover Operating Profit Interest Profit before Tax Tax Profit after Tax Ordinary dividend Retained Profit 000s 88.600 9,500 1400 8,100 2430 5,670 4,800 870 Effective rate of corporation tax is 30% Non-current Assets Current Assets Total Assets 000s 37,540 3.286 40,826 Current Liabilities Non-Curent Liabilities Total Liabilities Net As sets 1,759 10,000 11.759 29.067 Includes an overdraft of 840,000 14% Debenture maturing in 5 years