Alpha, a public listed corporation, is considering how it should raise TZS.10 billion of finance which is required for a major and vital non-current asset renewal scheme that will be undertaken during the current year to 31st December 2018. Alpha is particularly concerned about how analysts are likely to react to its financial statements for the year to 31st December 2018. Present forecasts suggest that Alpha’s earning per share and its financial gearing ratios may be worse than market expectations. Mr. Wanyemi, Alpha’s Finance Director, is in favor of raising the finance by issuing a convertible loan. He has suggested that the coupon (interest) rate on the loan should be 5%; this is below the current market rate of 9% for this type of loan. In order to make the stock attractive to investors, the terms of conversion into equity would be very favorable to compensate for the low-interest rate.
(i) Explain why the Finance Director believes the above scheme may favorably improve Alpha’s earnings per share and gearing.
(ii) Describe how the requirements of IAS 33: Earnings per share and IAS 32: Financial Instruments; presentation is intended to prevent the above effects.