full solutions to part a) b) and c) please

600 720 Question 1 Decio plc is considering two alternative proposals for financing an investment of 240 million. The first is to raise the required funds through a public issue of ordinary shares at a subscription price of E1 each. The other proposal is to raise the finance by way of a term loan from the company's bankers at an interest rate of 6% per annum. The term loans granted to the company carry the following special covenants: 1. Interest cover of not less than 3 times should be maintained. ii. The capital gearing ratio (calculated as Debt + (Debt + Shareholders' Funds) should not exceed 40%. Decio plc currently has 300 million ordinary shares in issue, each share having a face value of 50 pence. The company's latest financial statements for the year ended 31st December 2018 reveal the following information: (5 millions) Share capital & reserves 74% Term Loan 160 Capital Employed Earnings before interest & tax 75 Following the expansion scheme, profit before interest and tax is likely to increase by 36% from the previous year's level of 75 million, for the foreseeable future. The net dividend would remain at the current level of 7 pence per share. The rate of interest payable on the company's existing term loan will remain unchanged at 74% per annum. The corporation tax rate is 19 percent. Issue costs may be ignored. Required: (a) Assess the impact of each proposal on earnings per share (EPS) in the first year after implementation, and comment on your results. Discuss the advisability of making such decisions on the basis of EPS alone. (12 marks) (b) Assess the impact of the proposals on the following financial ratios in the first year after implementation: (1) Capital gearing ratio (11) Interest cover On the basis of your results, which type of finance do you think it would be advisable to use for Decio ple's expansion project? (9 marks) (c) Discuss the limitations of your analysis in parts (a) and (b) above and suggest how the analysis could be improved. (4 marks) (Total 25 marks) 600 720 Question 1 Decio plc is considering two alternative proposals for financing an investment of 240 million. The first is to raise the required funds through a public issue of ordinary shares at a subscription price of E1 each. The other proposal is to raise the finance by way of a term loan from the company's bankers at an interest rate of 6% per annum. The term loans granted to the company carry the following special covenants: 1. Interest cover of not less than 3 times should be maintained. ii. The capital gearing ratio (calculated as Debt + (Debt + Shareholders' Funds) should not exceed 40%. Decio plc currently has 300 million ordinary shares in issue, each share having a face value of 50 pence. The company's latest financial statements for the year ended 31st December 2018 reveal the following information: (5 millions) Share capital & reserves 74% Term Loan 160 Capital Employed Earnings before interest & tax 75 Following the expansion scheme, profit before interest and tax is likely to increase by 36% from the previous year's level of 75 million, for the foreseeable future. The net dividend would remain at the current level of 7 pence per share. The rate of interest payable on the company's existing term loan will remain unchanged at 74% per annum. The corporation tax rate is 19 percent. Issue costs may be ignored. Required: (a) Assess the impact of each proposal on earnings per share (EPS) in the first year after implementation, and comment on your results. Discuss the advisability of making such decisions on the basis of EPS alone. (12 marks) (b) Assess the impact of the proposals on the following financial ratios in the first year after implementation: (1) Capital gearing ratio (11) Interest cover On the basis of your results, which type of finance do you think it would be advisable to use for Decio ple's expansion project? (9 marks) (c) Discuss the limitations of your analysis in parts (a) and (b) above and suggest how the analysis could be improved. (4 marks) (Total 25 marks)