Bradfield plc’s shares have been trading at £5.00 over the last few days. The company has just reported record profits and next year profit after tax year is expected to be approximately £90 million. As the company has 100 million shares outstanding this gives an overall valuation for the company’s equity of £500 million. The company’s chairman has made it clear in a number of statements that some of the company’s growth will have to be funded externally despite its high profitability. In line with the chairman’s statements the company is to undertake a rights issue to raise £200 million to fund an investment programme that will allow the development of new markets. It is proposed to issue shares at a discount of twenty per cent, and to have the issue underwritten. A deep discount issue with new shares being offered at £2.00 was also considered by the board of directors, but it was decided to have an issue at a conventional discount. The new issue will have no impact on the expected profit after tax for next year. Hence, a) By specifying the terms of the planned issue, determine the theoretical ex-rights price (TERP), the expected value of a right, and demonstrate that in principle a shareholder will be equally well off by subscribing to the shares or by selling her rights. b) Adding to it, even though rights issues were initially introduced to protect the interests of shareholders the typical market reaction to the announcement of a rights issue is negative. Explain and discuss the statement.
Bradfield plc’s shares have been trading at £5.00 over the last few days. The company has just reported record profits and next year profit after tax year is expected to be approximately £90 million. As the company has 100 million shares outstanding this gives an overall valuation for the company’s equity of £500 million. The company’s chairman has made it clear in a number of statements that some of the company’s growth will have to be funded externally despite its high profitability. In line with the chairman’s statements the company is to undertake a rights issue to raise £200 million to fund an investment programme that will allow the development of new markets. It is proposed to issue shares at a discount of twenty per cent, and to have the issue underwritten. A deep discount issue with new shares being offered at £2.00 was also considered by the board of directors, but it was decided to have an issue at a conventional discount. The new issue will have no impact on the expected profit after tax for next year. Hence,
a) By specifying the terms of the planned issue, determine the theoretical ex-rights price (TERP), the expected value of a right, and demonstrate that in principle a shareholder will be equally well off by subscribing to the shares or by selling her rights.
b) Adding to it, even though rights issues were initially introduced to protect the interests of shareholders the typical market reaction to the announcement of a rights issue is negative. Explain and discuss the statement.
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