Aragon a bank has recently received a request for a #8287

Aragon (a bank) has recently received a request for a term loan from one of its customers,
Valencia plc, a company listed on the Alternative Investment Market of the London Stock
Exchange. Valencia plc's directors have requested a further £6 million (five-year floating rate)
term loan at an initial interest rate of 12 per cent per annum, in order to purchase new
equipment. The equipment will not materially change the company's current average
percentage return on investment. Valencia plc's turnover increased by 9 per cent during the last
financial year. Prior to receiving the request, the regional commercial manager of Aragon had
conducted a review of Valencia plc's financial position, and had decided to ask Valencia plc's
management to reduce the company overdraft by 25 per cent within the next six months.
Summarized financial statements for Valencia plc are as follows:Extract information from the
statement of profit and loss of Valencia plc_______________________________________20X
2...........................................................£'000Revenue...............................................99,360Profit
before interest and taxation.................10,760Finance
costs.........................................(3,840)Profit before tax.......................................6,920Income tax
expense.................................(2,420)Profit for the period..................................4,500Dividend
paid in the year.............................1100The company's debentures are currently trading at
£96.50 and equity 10p shares at £1.50. Comparative ratio information for Valencia plc's industry
(averages) ____________________________20X2Shore
price...........................£51.20Dividend yield........................2.5%Dividend payout
ratio................50%Gross asset turnover.............1.4 timesEarnings per share.............17.8
penceGearing...............................52.4%Acid test................................1 : 1Interest
cover.......................4 timesReturn on revenue (PBIT) ............9 %Return on
investment...............16.5%Requireda. You are a consultant for Aragon. You are required to
produce a reasoned case explaining why the bank should request a 25 per cent reduction in the
company's overdraft.b. You are a consultant for Valencia plc:i. Prepare a reasoned case to
present to Aragon in support of the new term loan.ii. Make recommendations to the board of
Valencia plc in respect of how you think the company's financial position might be
improved.(Clearly state any assumptions made. All assumptions must relate to all parts of the
question).View Solution:
Aragon a bank has recently received a request for a

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