Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

UCW Co is a listed company selling computer software. Its profit before interest and tax has fallen from $ 5 million to $ 1 million

UCW Co is a listed company selling computer software. Its profit before interest and tax has fallen from $5 million to $1 million in the last year, and its current financial position is as follows: $000 $000 Non-current assets Property, plant, and equipment 3,000 Intangible assets 8,50011,500 Current assets Inventory 4,100 Trade receivables 11,10015,200 Total assets 26,700 Current liabilities Trade payables 5,200 Overdraft 2,5007,700 Equity Ordinary shares 11,000 Paid in capital 8,00019,00026,700 Its bank has advised UCW Co that the current overdraft limit of $4.5 million will be reduced to $500,000 in two months. The finance director of UCW Co has been unable to find another bank willing to offer alternative overdraft facilities and is planning to issue bonds on the stock market to finance the reduction of the overdraft. The bonds would be issued at their par value of $100 per bond and pay interest of 9% per year, payable at the end of each year. The bonds would be redeemable at a 10% premium to their par value after ten years. The finance director hopes to raise $4 million from the bond issue. The ordinary shares of UCW Co have a par value of $100 per share and a current market value of $410 per share. The cost of equity of UCW Co is 12% per year, and the current interest rate on the overdraft is 5% per year. Taxation is at an annual rate of 30%. Other financial information: Average gearing of sector (debt/equity, market value basis): 10% Average interest coverage ratio of the sector: 8 times Required: (a) Calculate the aftertax cost of debt of the 9% bonds. (20 marks)(b) Calculate and comment on the effect of the bond issue on the weighted average cost of capital of UCW Co, clearly stating any assumptions you make. (20 marks)(c) Calculate the effect of using the bond issue to finance the reduction in the overdraft on (20 marks): (i) the interest coverage ratio. (ii) gearing. (d) Evaluate the proposal to use the bond issue to finance the reduction in the overdraft and discuss alternative sources of finance that could be considered by UCW Co, given its current financial position. (20 marks)(e) Evaluate the financial situation of the business, and make investment advice(20 m )

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Financial Management

Authors: Cheol Eun, Bruce Resnick

5thEdition

0073382345, 9780073382340

More Books

Students also viewed these Finance questions

Question

List the advantages and disadvantages of the pay programs. page 536

Answered: 1 week ago