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Evaluate whether using the cash raised by the rights issue to buy back bonds is likely to be financially acceptable to the shareholders of Squid Inc.

Evaluate whether using the cash raised by the rights issue to buy back bonds is likely to be financially acceptable to the shareholders of Squid Inc.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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 Evaluate whether using the cash raised by the rights issue to buy back bonds is likely to be financially acceptable to the shareholders of Squid Inc. 

Squid Inc. is a public listed company that is concerned by its current level of debt finance. It plans to make a right issue and use the funds raised to pay off some of its debt. The right issue will be at a 20% discount to its current ex-dividend share price of $7.50 per share. Squid Inc. plans to raise $90 million. Squid Inc. believes that paying off some of its debt will not affect its price earnings (PE) ratio, which is expected to remain constant. Income Statement information: $m Turnover 472 Cost of sales 423 49 Profit before interest and tax Interest 10 Profit before tax 39 Тах 12 27 Profit after tax Statement of Financial Position information: $m Equity Ordinary shares (S1 nominal) 60 80 140 Reserves Long-term liabilities 8% bonds ($100 nominal) 125 265 The 8% bonds are currently trading at $112.50 per bond and bondholders have agreed that they will allow Squid Inc. to buy back the bonds at this market value. Squid Inc. pays tax at a rate of 30% per year.
Transcribed Image Text:Squid Inc. is a public listed company that is concerned by its current level of debt finance. It plans to make a right issue and use the funds raised to pay off some of its debt. The right issue will be at a 20% discount to its current ex-dividend share price of $7.50 per share. Squid Inc. plans to raise $90 million. Squid Inc. believes that paying off some of its debt will not affect its price earnings (PE) ratio, which is expected to remain constant. Income Statement information: $m Turnover 472 Cost of sales 423 49 Profit before interest and tax Interest 10 Profit before tax 39 Тах 12 27 Profit after tax Statement of Financial Position information: $m Equity Ordinary shares (S1 nominal) 60 80 140 Reserves Long-term liabilities 8% bonds ($100 nominal) 125 265 The 8% bonds are currently trading at $112.50 per bond and bondholders have agreed that they will allow Squid Inc. to buy back the bonds at this market value. Squid Inc. pays tax at a rate of 30% per year.
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