Page 30 - MCS August Day 1 Suggested Solutions

CIMA AUGUST 2018 – MANAGEMENT CASE STUDY

Exercise 2 – Sources of finance and calculation of WACC
Montel may need to raise finance in order to:
 acquire one or more subsidiaries
 invest in upgraded PPE
 implement any plans to rationalise the business

At 31 March 2018, Montel held F$856m in cash and cash equivalents which, whist appearing
adequate to meet liabilities as they fall due, would probably be insufficient to finance an
acquisition. Any significant investment would need to be financed by raising cash from additional
loan or equity finance, or by a making a share‐for‐share issue.

During 2018, there was a small increase in debt finance from F$4,400m to F$4,600m. This
represents less than 5% of capital employed and Montel should not have difficulty in raising
additional loan finance if this was required. If additional equity or loan financed was raised,
Montel would need to comply with the appropriate stock exchange regulations.

Debt finance
Montel could borrow funds from its bank or other organisations that specialise in lending to
corporate entities. This could include a market issue of debt, which would require compliance
with stock exchange regulations.

Montel holds significant tangible non‐current assets which will primarily be in the form of
property (premises for manufacturing) and plant and equipment. Such assets could be readily
used as security for debt finance.

Currently Montel’s gearing seems low at less than 5% and interest cover is reasonable at 7.1
times. It would seem that Montel could afford to increase its debt level if required and this could
be supported by the generation of profits and cash.

Although unlikely, Montel may need to consider whether raising further debt finance might
breach any existing loan covenants. Additionally, it would need to be aware of any covenants that
may be imposed by prospective lenders, for example in the form of a dividend restriction.

Equity finance
As Montel is a listed entity it could issue shares on the stock exchange to raise capital. If this route
was adopted, there would be stock exchange compliance and corporate governance factors to
consider.

Alternatively Montel could consider a rights issue to its’ existing shareholders. A rights issue
would have the advantage of maintaining the current ownership and would avoid any dilution of
ownership. It would also be cheaper compared to a full market issue. A rights issue may have a
greater chance of success as it involves existing shareholders rather than trying to persuade new
investors to provide the required finance. However, as a general rule, a rights issue is typically

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