Ican 2024 Strategic Financial Management Question 3

Tope operates a chain of cellular telephone stores in the country. An abbreviated profit or loss account and statement of financial position of the business for the year that has just ended is as follows: Abbreviated profit or loss account for the year ended 31 May 2023 ₦‟000 Sales 6,450 Operating profit for the year 800 Interest payable (160) Net profit before taxation 640 Tax (20%) (128) Net profit after taxation 512 Dividends proposed (256) Retained profit for the year 256 Abbreviated statement of financial position as at 31 May 2023 ₦‟000 ₦‟000 Non-current assets at written down values 3,500 Current assets 1,800 Less: Current liabilities (1,100) 700 4,200 Less: long-term liabilities (2,000) 2,200 Capital and reserves ₦0.50 ordinary shares 600 Retained profit 1600 2,200 The company is expecting a surge in sales following advances in cellular telephone technology that should translate into additional operating profits of ₦180,000 per year for the foreseeable future. However, the company will need to invest ₦1,200,000 immediately in expanding the asset base of the business, if it is to achieve these additional profits. The business has approached a large supplier that already has an equity investment in the business to see whether it would be prepared to provide further funds for the business. The supplier has indicated it would be willing to provide the necessary funds by either: (i) An issue of ₦0.50 ordinary shares at a premium of ₦1.50 per share; or (ii) An issue of ₦1,200,000 10% debt at par. The Board of Directors of Tope has already announced that it will maintain the same dividend payout ratio in future years as in the past and that this policy will be unaffected by the form of finance raised.