Weaver Plus is a company listed on the New York Stock Exchange market. Extracts from its current statement of financial position are as follows: $’m $’m Equity Ordinary shares (K1 nominal) 15 Reserves 153 168 Non-current liabilities 8% Irredeemable loan notes 10 6% Loan notes 12 22 190 Weaver Plus is planning on expansion of its existing business line and locations costing $10 million in the near future and is assessing its current financial position as part of preparing a business case in support of seeking new finance. The business expansion is expected to increase the profit before interest and tax of Weaver Plus by 20% in the first year. The planned business expansion by Weaver Plus has already been announced to the stock market. Information on the expected increase in profit before interest and tax has not yet been announced and the company has not decided on how the expansion is to be financed. The ordinary shares of the company are currently trading at $3·75 per share on an ex dividend basis. The irredeemable loan notes have a cost of debt of 7%. The 7% loan notes have a cost of debt of 6% and will be redeemed at a 5% premium to nominal value after seven years. The interest cover of Weaver Plus is 6 times. Companies operating in the same business sector as Weaver Plus have an average debt/equity ratio of 40% on a market value basis and an average interest cover of 9 times. Weaver Plus agrees with a bank that its business expansion will be financed by a new issue of 8% loan notes. The company then announces to the stock market both this financing decision and the expected increase in profit before interest and tax arising from the business expansion
Weaver Plus is a company listed on the New York Stock Exchange market. Extracts from its current
|
$’m |
$’m |
|
|
Equity |
||
|
Ordinary shares (K1 nominal) |
15 |
|
|
Reserves |
153 |
|
|
168 |
||
|
Non-current liabilities |
||
|
8% Irredeemable loan notes |
10 |
|
|
6% Loan notes |
12 |
|
|
22 |
||
|
190 |
Weaver Plus is planning on expansion of its existing business line and locations costing $10 million in the near future and is assessing its current financial position as part of preparing a business case in support of seeking new finance. The business expansion is expected to increase the profit before interest and tax of Weaver Plus by 20% in the first year. The planned business expansion by Weaver Plus has already been announced to the stock market. Information on the expected increase in profit before interest and tax has not yet been announced and the company has not decided on how the expansion is to be financed.
The ordinary shares of the company are currently trading at $3·75 per share on an ex dividend basis. The irredeemable loan notes have a cost of debt of 7%. The 7% loan notes have a cost of debt of 6% and will be redeemed at a 5% premium to nominal value after seven years. The interest cover of Weaver Plus is 6 times. Companies operating in the same business sector as Weaver Plus have an average debt/equity ratio of 40% on a market value basis and an average interest cover of 9 times.
Weaver Plus agrees with a bank that its business expansion will be financed by a new issue of 8% loan notes. The company then announces to the stock market both this financing decision and the expected increase in profit before interest and tax arising from the business expansion.
Required:
Discuss and analyse the effect of the financing and profitability announcement on the financial risk and share price of Weaver Plus assuming that the stock market is semi-strong form efficient
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