First 3 sub parts were solved, answer only the last part, with what will be the change in wealth for a shareholder who had 100 shares before the rights issue. The earnings per share after the right issue is £1.1356. A total of 11,428,571 shares must be issued to raise £24 million.
First 3 sub parts were solved, answer only the last part, with what will be the change in wealth for a shareholder who had 100 shares before the rights issue. The earnings per share after the right issue is £1.1356. A total of 11,428,571 shares must be issued to raise £24 million.
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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Question
First 3 sub parts were solved, answer only the last part, with what will be the change in wealth for a shareholder who had 100 shares before the rights issue.
The earnings per share after the right issue is £1.1356.
A total of 11,428,571 shares must be issued to raise £24 million.
Transcribed Image Text:Duncan plc is financed by 5 million shares of equity with a market capitalisation of
£90 million, and debt with a face value and market value of £48 million. The interest
rate on the debt is 7% and debt interest is tax deductible. The firm's most recent
earnings before interest and tax is £25 million. The corporate tax rate is 20%. There
are no market imperfections apart from corporate tax.
a) What are Duncan's current earnings per share, share price, and cost of equity
(return on equity)?
Suppose the firm decides to change its capital structure by holding a rights issue to
raise enough cash to reduce the debt to £24 million. The rights price will be at a
25% off the current share price.
b) How many new shares must be issued in the rights issue? What will be the new
earnings per share?
What is Duncan's share price following the rights issue?
What is Duncan's cost of equity following the rights issue? Has it changed?
Why/why not?
What will be the change in wealth for a shareholder who had 100 shares in
Duncan before the rights issue? Why? Will the rights issue succeed? Explain.
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