B2. Equity financing (Answer all parts of this question.) A company with a market capitalization of GBP 100 mn has the prospect of making a highly profitable new investment of GBP 10 mn. However, the firm has no funds available, and therefore intends to raise the funds required in a rights offer. The firm has currently 1 mn shares outstanding. The new shares are to be issued at a price of GBP 50. (a) (2P) What is the current share price? (b) (2P) How many new shares will be issued to raise the funds? (c) (2P) How many shares does an existing shareholder need to be entitled to buy one new share at GBP 50 in the rights offer? (d) (4P) What is the share price after the rights offer? (e) (4P) What is the fair price of a right to buy a new share at GBP 50? (f) (2P) Show that an existing shareholder with 100 shares is not worse off if not participating at the rights offer. (g) (2P) What is the main theorem by Modigliani & Miller regarding the payout policy? (h) (2P) What are the assumptions for this theorem to hold?

B2. Equity financing (Answer all parts of this question.) A company with a market capitalization of GBP 100 mn has the prospect of making a highly profitable new investment of GBP 10 mn. However, the firm has no funds available, and therefore intends to raise the funds required in a rights offer. The firm has currently 1 mn shares outstanding. The new shares are to be issued at a price of GBP 50. (a) (2P) What is the current share price? (b) (2P) How many new shares will be issued to raise the funds? (c) (2P) How many shares does an existing shareholder need to be entitled to buy one new share at GBP 50 in the rights offer? (d) (4P) What is the share price after the rights offer? (e) (4P) What is the fair price of a right to buy a new share at GBP 50? (f) (2P) Show that an existing shareholder with 100 shares is not worse off if not participating at the rights offer. (g) (2P) What is the main theorem by Modigliani & Miller regarding the payout policy? (h) (2P) What are the assumptions for this theorem to hold?

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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Firms A and B are identical except for their capital structure. A carries no debt, whereas B carries £60m of debt on which it pays a 5% interest rate. Assume no transaction costs, no taxes and risk-free debt. The relevant numbers are provided in the following table (in £ m): A B Value of Firm 100 120 Debt 60 Equity 100 60 Projected earnings before interest 12 12 Interest payment Not Interest rate Applicable 5% Please answer the following questions a) "The situation described in the table is consistent with the absence of arbitrage opportunities". True or False (T/F)? b) Which one of the two firms is relatively overvalued (A/B)? c) "B's shares carry more risk than A's shares". True or False (T/F)? d) What is the return to an investor holding a 10% stake in B (in £ '000)? e) Consider an investor who wants to purchase a 20% stake in A. If he wished to replicate B's capital structure through homemade leverage, how much would he need to borrow to finance his position in £m? ) What is the…
Need All.
1)Warwickshire plc is appraising a new project in a different line of business to its core operations. It has identified a suitable company, Nottingham plc, to use as a proxy. Details are as follows:Equity beta of Nottingham 1.250Market value of Nottingham's debt: £39mMarket value of Nottingham's equity: £45mCorporation Tax rate (both companies): 30%If Warwickshire is finance by £95m of equity and £95m of debt what would a suitable proxy equity beta for Warwickshire plc to use in the appraisal process? 2) Ms Obang is reviewing the performance of one of the shares in her portfolio. She bought the share a year ago for £4.00 (ex-div). Over the year it paid a dividend of 20p and the share price currently stands at £4.20 (ex-div). The shares equity beta is 1.4. The yield on short-date Treasury Bills over the year has been 1.2% and the Market Return is 6%. Using the CAPM, what has been the performance of the share over the last year? 3) The following information relates to the acquisition of…
N3. assume capital markers are perfect snd the modigiliani-miller theorier hold. mercury electronics is currently an all equity financed company worth 185 million. they are planning to issue 74 million in debt. after issuing this debt, what will be the value of their equity?
Paragraph:Santa PLC is an all equity financed company with 100 million shares outstanding trading at €2 per share. Its management has decided to invest in a major new development that will cost € 40 million, and is now considering ways to finance the investment. Various alternatives have been considered but the choice has been narrowed down to a rights issue or the issue of debentures (a kind of bond).The rights issue would be made at a discount of 20% and be underwritten at a cost of 2% of the proceeds. The company’s chairman has discussed the proposed investment and its prospects as well as the financing possibilities, quite openly with various institutions and the financial press. As a result it is likely that the share price already reflects the implications of the company’s proposed investment.a) Determine the terms of the right issue, the ex-rights price and the theoretical value of the right.b) Explain and assess the view that rights issues are designed to protect the interests…
A company has EBITDA of $100m. If a private equity fund acquires this company in a Leveraged Buy-Out for an EBITDA multiple of 3x, borrowing 50% of the purchase price, and sells the company for a multiple of 5x when the company's EBIDTA has increased to $150m, what will be the value of the equity investment in the company upon exit? What is it as a multiple of the initial equity investment? 8)
RAFA Corp. is considering to issue new shares with a par value of P1,000, issue price of P1,200 and net proceeds of 1,050. Shareholders expect dividends of P80 per share for the first year and a growth rate of 4%. It may also use retained earnings as an alternative source of financing? Choosing the better alternative of the two, what would the incremental cost of capital be for RAFA? * 11.619 10.667 12.000 7.924
Firm A and B have the same capital structure. A: No debt. B: have £100m debt and pay 5% interest rate. Assume: no tax and perfect capital market. The firm lend and borrow at same risk-free rate. 1）B's weighted average cost of capital （Answer：8） 2）Assume A is fairly priced, what would be B’s weighted average cost of capital in the absence of arbitrage opportunities? （Answer：10 or 0.1）
Thank you so much!
28) National paints SAOG is planning to issue new securities in the financial market to raise capital for its new project. Which of the following market can the company issue its shares? a. None b. Money Market c. Bond Market d. Secondary Market
D6) Finance the stock of apsara ltd is currently trading at a price of 500 another stock reynolds ( with similar cost of equity i .e., 20%) is trading at 400 per share. If the current divident per share paid by both reynolds and apsara is the same, then what would be the reasons behind the diffrence in stock prices of both these companies. explain your answer with adequate rationale

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