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Nugfer Co (Dec 10 – Amended)

The following financial position statement as at 30 November 2010 refers to Nugfer Co, a stock exchange-listed company, which wishes to raise $200m in cash in order to acquire a competitor.

 

$m

$m

Assets

 

 

Non-current assets

 

300

Current assets

 

211

Total assets

 

511

Equity and liabilities

 

 

Share capital

100

 

Retained earnings

121

 

Total equity

 

221

Non-current liabilities

 

 

Long-term borrowings

 

100

Current liabilities

 

 

Trade payables

30

 

Short-term borrowings

160

 

Total current liabilities

 

190

Total liabilities

 

290

Total equity and liabilities

 

511

The recent performance of Nugfer Co in profitability terms is as follows:

Year ending 30 November

2007

2008

2009

2010

 

$m

$m

$m

$m

Revenue

122.6

127.3

156.6

189.3

Operating profit

41.7

43.3

50.1

56.7

Finance charges (interest)

6.0

6.2

12.5

18.8

Profit before tax

35.7

37.1

37.6

37.9

Profit after tax

25.0

26.0

26.3

26.5

Notes:

(1) The long-term borrowings are 6% bonds that are repayable in 2012.

(2) The short-term borrowings consist of an overdraft at an annual interest rate of 8%.

(3) The current assets do not include any cash deposits.

(4) Nugfer Co has not paid any dividends in the last four years.

(5) The number of ordinary shares issued by the company has not changed in recent years.

(6) The target company has no debt finance and its forecast profit before interest and tax for 2011 is $28 million.

Required:

A. Evaluate suitable methods of raising the $200 million required by Nugfer Co, supporting your evaluation with both analysis and critical discussion.
B. Briefly explain the factors that will influence the rate of interest charged on a new issue of bonds.

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