Page 31 - CIMA May 18 - MCS Day 1 Suggested Solution

SUGGESTED SOLUTIONS

Exercise 2

Menta may need to raise finance in order to:
 acquire one or more subsidiaries
 invest in upgraded PPE – electric buses, safer buses (e.g. fitted with seat belts) etc
 implement any plans to rationalise the business

At 31 December 2017, Menta held C$327.4m in cash and cash equivalents, which represents over
55% current assets and 20% of net assets. Some projects / acquisitions may therefore be funded
from existing cash resources. However, in terms of raising additional finance Menta could
consider sources of both debt and equity finance.

During 2017, there was a significant reduction in long‐term debt finance of C$171.3m from
C$456,3m to C$285m. There was also an increase in equity capital as the combined share
capital/share premium increased by C$162.6m during the same period. It is possible that the
share issue was made to finance repayment of the long‐term loan.

It is unclear whether Menta is a listed entity. Based upon the geographical range and extent of its
activities (rural, city and inter‐city) in several countries with over 80 operating units, it would not
be unexpected if Menta was, in fact, a listed entity.

Debt finance
Menta could borrow funds from its bank or other organisations that specialise in lending to
entities operating in the public transport sector.

If Menta is a listed entity, it would be able to issue bonds on the stock market. This would have
the benefit of being able to raise finance from many different investors and so could probably
raise a significant amount.

Menta holds significant tangible non‐current assets which will primarily be in the form of property
(depots), vehicles and some equipment. Such assets could be readily used as security for debt
finance.

Currently Menta’s gearing seems quite moderate at 15% and interest cover is high at 64.7 times.
It would seem that Menta could afford to increase its debt level if required and this could be
supported by the generation of profits and cash.

Although unlikely, Menta 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
If Menta is a listed entity it could issue shares on the stock exchange to raise capital. If Menta is
not a listed entity, it could seek a listing of shares for the first time. If this was the case, there are
likely to be additional compliance and corporate governance factors that need to be considered.

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