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(a) Calculate the theoretical ex-rights price per share of Squid Inc. following the rights issue

(a) Calculate the theoretical ex-rights price per share of Squid Inc. following the rights issue

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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(a) Calculate the theoretical ex-rights price per share of Squid Inc. following the rights issue

Squid Inc. is a public listed company that is concerned by its current level of debt finance. It plans to make a right issue and use the funds raised to pay off some of its debt. The right issue will be at a 20% discount to its current ex-dividend share price of $7.50 per share. Squid Inc. plans to raise $90 million. Squid Inc. believes that paying off some of its debt will not affect its price earnings (PE) ratio, which is expected to remain constant. Income Statement information: $m Turnover 472 Cost of sales 423 49 Profit before interest and tax Interest 10 Profit before tax 39 Тах 12 27 Profit after tax Statement of Financial Position information: $m Equity Ordinary shares (S1 nominal) 60 80 140 Reserves Long-term liabilities 8% bonds ($100 nominal) 125 265 The 8% bonds are currently trading at $112.50 per bond and bondholders have agreed that they will allow Squid Inc. to buy back the bonds at this market value. Squid Inc. pays tax at a rate of 30% per year.
Transcribed Image Text:Squid Inc. is a public listed company that is concerned by its current level of debt finance. It plans to make a right issue and use the funds raised to pay off some of its debt. The right issue will be at a 20% discount to its current ex-dividend share price of $7.50 per share. Squid Inc. plans to raise $90 million. Squid Inc. believes that paying off some of its debt will not affect its price earnings (PE) ratio, which is expected to remain constant. Income Statement information: $m Turnover 472 Cost of sales 423 49 Profit before interest and tax Interest 10 Profit before tax 39 Тах 12 27 Profit after tax Statement of Financial Position information: $m Equity Ordinary shares (S1 nominal) 60 80 140 Reserves Long-term liabilities 8% bonds ($100 nominal) 125 265 The 8% bonds are currently trading at $112.50 per bond and bondholders have agreed that they will allow Squid Inc. to buy back the bonds at this market value. Squid Inc. pays tax at a rate of 30% per year.
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