The following are the accounts of Bouncy plc, a company that manufactures playground equipment, for the year ended 30 November 20X6
The directors are considering two schemes to raise £6,000,000 in order to repay the debentures and finance expansion estimated to increase profit before interest and tax by £900,000. It is proposed to make a dividend of 6p per share whether funds are raised by equity or loan. The two schemes are:
(1) an issue of 13% debentures redeemable in 30 years;
(2) a rights issue at £1.50 per share. The current market price is £1.80 per share (20X5: £1.50; 20X4: £1.20).
(a) Calculate the return on equity and any three investment ratios of interest to a potential investor.
(b) Calculate three ratios of interest to a potential long-term lender.
(c) Report briefly on the performance and state of the business from the viewpoint of a potential shareholder and lender using the ratios calculated above and explain any weaknesses in these ratios.
(d) Advise management which scheme they should adopt on the basis of your analysis above and explain what other information may need to be considered when making the decision.