Question 31c
The following statement of financial position information relates to Tufa Co, a company listed on a large stock market which pays corporation tax at a rate of 30%.
| $m | $m | |
|---|---|---|
| Equity and liabilities | ||
| Share capital | 17 | |
| Retained earnings | 15 | |
| Total equity | 32 | |
| Non-current liabilities | ||
| Long-term borrowings | 13 | |
| Current liabilities | 21 | |
| Total liabilities | 34 | |
| Total equity and liabilities | 66 |
The share capital of Tufa Co consists of $12m of ordinary shares and $5m of irredeemable preference shares.
The ordinary shares of Tufa Co have a nominal value of $0·50 per share, an ex dividend market price of $7·07 per share and a cum dividend market price of $7·52 per share. The dividend for 20X7 will be paid in the near future.
Dividends paid in recent years have been as follows:
| Year | 20X6 | 20X5 | 20X4 | 20X3 |
|---|---|---|---|---|
| Dividend ($/share) | 0·43 | 0·41 | 0·39 | 0·37 |
The 5% preference shares of Tufa Co have a nominal value of $0·50 per share and an ex dividend market price of $0·31 per share.
The long-term borrowings of Tufa Co consist of $10m of loan notes and a $3m bank loan. The bank loan has a variable interest rate.
The 7% loan notes have a nominal value of $100 per loan note and a market price of $102·34 per loan note. Annual interest has just been paid and the loan notes are redeemable in four years’ time at a 5% premium to nominal value.
Required:
(c) Discuss THREE advantages to Tufa Co of using convertible loan notes as a source of long-term finance. (6 marks)