Quick question :)

Goldshlager

If anyone could help me with this question that would be great:o

A company has in issue £1,000,000 3% debentures, £500,000 £2 5% preference shares and £1,000,000 ordinary shares on which it declares a dividend of 9p per share. The ordinary shares have a nominal value of £2. What is the total amount the company will pay for the year in interest and dividends?

Plz show workings:P

Thanks

Newaglish

Debentures
£1,000,000 @ 3% = £30,000

Preference Shares
£500,000 @ 5% = £25,000

Ordinary Shares
£1,000,000 / £2 = 500,000 shares
500,000 @ .09p = £45,000

Total cost = 30,000 + 25,000 + 45,000 = £100,000

I'm assuming you meant £500,000 worth of £2 preference shares, and not 500,000 £2 preference shares, which would make the calculation different. Hope this helps.

Goldshlager

That's what i thought aswell.

The answer according to the book is 73,000 and i was staring at it for an hour trying to figure it out. :mad:

So ya it helped. I could have spent all day tomorrow at it too.:P
Thanks:pac:

Newaglish

Is there a tax rate?

The interest payments will be tax deductible, which would explain why the actual cost to the company would be less than the £100k figure.

hivizman

The answer in the book would work if the ordinary shares had a nominal value of £5 rather than £2. Then there would be 200,000 ordinary shares rather than 500,000, and the dividend on ordinary shares would be £18,000 rather than £45,000.

Goldshlager

Nope. No tax.
Its a short question ya see. Thats all the info that was given.
Misprint methinks:pac: