Awen Ltd is a manufacturer of machine tools and is at present contemplating an issue of GH¢2,000,000 10% debenture stock (2020) in order to assist the remodelling of its present production facilities. Some shareholders are reluctant to approve additional long-term debt due to the fact that the machine tools industry is subject to wide-ranging fluctuations in sales and profits. A group of shareholders have approached you and asked you to comment on the performance of Awen Ltd as compared with industrial averages and to make recommendations as to whether they should approve the proposed additional long- term debt. Abbreviated financial statements and typical ratios for firms in the machine tools industry are as follows: Awen Ltd Statement of Comprehensive Income for the year ended 31/12 2005 2004 GH¢000 GH¢000 Sales 23,500 16,000 7,500 (2,000) (3,000) 20,500 14,000 6,500 (1,900) (2,600) Cost of Sales Gross profit Selling expenses Administrative expenses Operating profit Interest cost 2,500 _(500) 2,000 _(300) Profit before tax 2,000 (1,200) 800 6,365 1,700 (1,020) 680 6,090 Taxation Profit after tax Income surplus a/c

Awen Ltd is a manufacturer of machine tools and is at present contemplating an issue of GH¢2,000,000 10% debenture stock (2020) in order to assist the remodelling of its present production facilities. Some shareholders are reluctant to approve additional long-term debt due to the fact that the machine tools industry is subject to wide-ranging fluctuations in sales and profits. A group of shareholders have approached you and asked you to comment on the performance of Awen Ltd as compared with industrial averages and to make recommendations as to whether they should approve the proposed additional long- term debt. Abbreviated financial statements and typical ratios for firms in the machine tools industry are as follows: Awen Ltd Statement of Comprehensive Income for the year ended 31/12 2005 2004 GH¢000 GH¢000 Sales 23,500 16,000 7,500 (2,000) (3,000) 20,500 14,000 6,500 (1,900) (2,600) Cost of Sales Gross profit Selling expenses Administrative expenses Operating profit Interest cost 2,500 _(500) 2,000 _(300) Profit before tax 2,000 (1,200) 800 6,365 1,700 (1,020) 680 6,090 Taxation Profit after tax Income surplus a/c

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter24: Bankruptcy, Reorganization, And Liquidation

Section: Chapter Questions

Problem 1P: Southwestern Wear Inc. has the following balance sheet: The trustees costs total 281,250, and the...

See similar textbooks

Similar questions

21. Seal Company is experiencing financial difficulty and is negotiating debt restructuring with its creditor to relieve its financial stress. Seal has a P2,500,000 note payable to United Bank. The bank accepted an equity interest in Seal Company in the form of 200,000 ordinary shares quoted at P12 per share. The par value is P10 per share. The fair value of the note payable on the date of restructuring is P2,200,000. What amount should be recognized as gain from debt extinguishment as a result of the "equity swap”? * a. 400,000 b. 100,000 c. 500,000 d. 200,000 Refer to MC No. 21. What amount should be recognized as share premium from the issuance of the shares? * a. 500,000 b. 100,000 c. 400,000 d. 200,000
Consider the following worksheet with information extracted from a financial statement:2020 Assets Liabilities EquityReported (P) 400 000 100 000 300 000You identify that a firm has incorrectly recognized revenue on P50 000 worth of goods in the form of receivables. You decide to reverse this sale and the associated inventory which has a value of P40 000. Using the worksheet approach and assuming a corporate tax rate of 30 percent, what would be the adjusted debt to assets ratio?
The common stock and debt of the listed French clothing company Fille Provocatrice are valued at EUR500 million and EUR300 million respectively. Shareholders currently require a 9% return and the cost of debt is 3%. Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes. If Fille Provocatrice issues an additional USD 100 million of debt and uses this money to buy back shares, what happens to the cost of equity of the stock? The new cost of equity of the stock comes closest to 0 9.0% 0 9.5% 10.0% 0 D 11.0%
A company is experiencing financial difficulty and is negotiating a trouble debt restructuring with its creditors for its P6,000,000 note payable. The bank accepted an equity interest from the company in a form of 200,000 ordinary shares. The fair value of ordinary shares is P20 per share. What is the amount of gain on debt restructuring to be reported by the company in its profit or loss?
DEBT RESTRUCTURING On January 1, 2022, ACT company borrowed funds from DEF Finance by issuing a promissory note for P1,500,000. Due to the economic downtrend in the industry of ACT Company, the company experienced low sales and therefore cannot meet its obligation in 2024. On December 31, 2024, which is the maturity date of the obligation, DEF finance accepted the offer of ACT Company’s building with a cost of P 2,500,000 and accumulated depreciation balance on this date of P 750,000 in full settlement of the note and annual accrued interest at 12%. Interest is payable annually and the building has a fair value on the date of restructuring of P 1,600,000. Provide the journal entries for each problems and assumptions.
Seal Company is experiencing financial difficulty and is negotiating debt restructuring with its creditor to relieve its financial stress. Seal has a P2,500,000 note payable to United Bank. The bank accepted an equity interest in Seal Company in the form of 200,000 ordinary shares quoted at P12 per share. The par value is P10 per share. The fair value of the note payable on the date of restructuring is P2,200,000. What amount should be recognized as share premium from the issuance of the shares? a. 500,000 b. 100,000 c. 400,000 d. 200,000
If iOS Corp. issues an additional $8 million of debt and uses this money to retire common stock, what will be the expected return on the stock? Assume that the change in capital structure does not affect the risk of the debt, and recall that the WACC under the initial capital structure is 13.85%. Enter your answer as a percentage. Do not include the percentage sign in your answer. Enter your answer rounded to 2 DECIMAL PLACES. TE= Number Click "Verify" to proceed to the next part of the question.
As a result of a recession Dafen plc has recorded losses over the last three years and has been forced to increase its borrowing. The board of directors has decided that the company cannot increase its debt-equity ratio further and it has been decided to reduce its level of debt. On this basis it has decided to undertake a rights issue to raise £200 million. The company’s shares are trading at £4.00 and it is proposed to make the rights issue at a discount of 20 per cent to this price. The company has 250 million shares outstanding. Assume the investor chooses to sell their rights. How many shares in the company does the investor hold after the shares have gone ex-rights?
A company buys a debt investment for $316, 000. At the end of 2023, the amortized cost of the investment is $315,000 and the fair value of the investment is $322, 000. The company intends to hold the investment until maturity and does not intend to use the fair value option. Therefore, the company must report the investment at $316,000 on its 2023 year-end balance sheet. True or False
Edwards Construction currently has debt outstanding with a market value of $128,000 and a cost of 12 percent. The company has EBIT of $15,360 that is expected to continue in perpetuity. Assume there are no taxes. a-1. What is the value of the company's equity? (Do not round intermediate calculations. Leave no cell blank - be certain to enter "0" wherever required.) a-2. What is the debt-to-value ratio? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. What are the equity value and debt-to-value ratio if the company's growth rate is 4 percent? (Do not round intermediate calculations and round your "Debt-to-value" answer to 3 decimal places, e.g., 32.161.) c. What are the equity value and debt-to-value ratio if the company's growth rate is 9 percent? (Do not round intermediate calculations and round your "Debt-to-value" answer to 3 decimal places, e.g., 32.161.)
Suppose a company borrows $1 million debt to invest in a project that generates uncertain future cash flow (revenue) of 0~$2 million (when debt is due). The debt has to be repaid (interest rate is zero) when the project's cash flow is realized. Assume 46% of the cash flow (revenue) is lost upon bankruptcy (i.e., when debtholders control the firm). Also, assume that renegotiations are allowed and the manager may be allowed to stay if debtholders find it better than firing. Instead of equal bargaining power, if borrower has full bargaining power (borrower gets 100% of renegotiation), at what company cash flow does strategic default start to occur? 1.46 million 1.0 million 1.97 million 1.85 million
On December 31, 2020, Petra Company invests $40,000 in Valery, a variable interest entity. In contractual agreements completed on that date, Petra established itself as the primary beneficiary of Valery. Previously, Petra had no equity interest in Valery. Immediately after Petra's investment, Valery presents the following balance sheet: Cash Marketing software Computer equipment Total assets 40,000 160,000 60,000 $ 260,000 $ Required A Long-term debt Noncontrolling interest Petra equity interest Total liabilities and equity Each of the amounts represents an assessed fair value at December 31, 2020, except for the marketing software. The December 31 business fair value of Valery is assessed at $160,000. Required B a. If the carrying amount of the marketing software was undervalued by $45,000, what amounts for Valery would appear in Petra's December 31, 2020, consolidated financial statements? Complete this question by entering your answers in the tabs below. b. If the carrying amount of…