An investor is evaluating the following financial information related to Leema PLC in order to buy shares of the company.

For the year 2020, the company has recorded a net profit after tax of Rs. 138 million and has proposed a dividend payout of 50%. The number of ordinary shares issued by the company is 50 million.

Due to the adverse effects of the COVID-19 pandemic on the country, the expected dividend growth rate of the company for the next two years would decline by 1% when compared to the current dividend growth rate of the company. Thereafter, the expected dividend growth rate would be 4%.

Investors also expect an additional risk premium of 2% compared to the 13% return given by other companies in the same industry due to recent changes in the board of directors of Leema PLC.

The market price of a share of the company is Rs. 18.75.

Required:

Advise whether an investor should invest in the shares of Leema PLC.   (10 Marks)

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KFP Co, a company listed on a major stock market, is looking at its cost of capital as it prepares to make a bid to buy a rival unlisted company, NGN. Both companies are in the same business sector.

Financial information on KFP Co and NGN is as follows:

Required:

      i. Price/earnings ratio method, using the price/earnings ratio of KFP Co;
          and
      ii. Dividend growth 

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The statement of financial position of BKB Co provides the following information:

BKB Co has an equity beta of 1.2 and the ex-dividend market value of the company's equity is Rs.125m. The ex-interest market value of the 7% bonds is Rs. 21m. They are redeemable in five years' time at Rs. 115 per Rs. 100 of nominal value. The ex-dividend market value of the preference shares is Rs. 6.25m and these are irredeemable.

The overdraft has a variable interest rate which is currently 6% per year and BKB Co expects this to increase in the near future. The overdraft has not changed in size over the last financial year, although one year ago the overdraft interest rate was 4% per year. The company's bank will not allow the overdraft to increase from its current level.

The equity risk premium is 5% per year and the risk-free rate of return is 4% per year. BKB Co pays profit tax at an annual rate of 30% per year.

Required

Alpex Company is public company listed in the Colombo Stock Exchange. You are provided the following summarized balance sheet as at 31^st March 2018.

The summarized balance sheet of the company as at 31/03/2018 is as follows:

The company is planning to invest in a personnel training programme in the next year. Investment outlay, Rs. 1,000,000/- will be charged off as an expense by the firm in next year. The returns from the programme in the form of greater productivity and a reduction in employee turnover are estimated as follows (on an after-tax basis):

Years 1-10          Rs.150,000 per annum

Years 11-15        Rs.100,000 per annum

The Company’s new financing policy is to finance its assets with 60% equity (book value) and the balance with long-term debt. Any adjustment at the end of accounting year is to be done by the use of additional bond at 12%. Company’s cost of equity was at 15% in the past and also expects to maintain its new capital structure policy for the explicit future period.

The company plans to issue bond and uses the proceeds to increase its inventory by 200%, to increase Plant and Equipment by Rs. 1.4 million and to decrease trade debtors by Rs. 1 million. The company expects that next year’s net profit after taxes would be Rs. 3.2 million.

Income tax rate is 35%.

You are required to:

b ). Assess the investment project based on net present value criteria and decide whether the company should undertake the training programme? Why?                                                                                                                                                                 

c ). Assess the requirement of new issue of bond capital in order to consistent with new capital structure policy.                                                                                                                                                                 

d ). Prepare new balance sheet immediately after implementing new proposals (ignore other changes).

e ). Discuss the immediate impact of the changes in balance sheet item on the following ratios? Current ratio, Quick ratio, Debt to total assets ratio, and ROE

State any assumptions that you made.                                          
(40 marks)

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