QUESTION TWO A. What is a financial market? B. The directors of a company are planning to undertake a rights issue. Describe the factors that should be taken into account in deciding whether to have this issue underwritten instead. C. D Plc is in the process of making a 1 for 4 rights issue. The rights letters have just been sent to shareholders. The company currently has 20m K1 shares in issue and the current market price is K4.50 per share. The rights letter gives shareholders the right to buy their new shares for K3.50 each. D Plc plans to use the cash raised to build a major extension to its factory, thereby doubling production capacity. The finance director has received an angry letter from a shareholder. The shareholder complains that he cannot afford to invest in new shares. He contends that he is likely to suffer a loss because of the fact that the market will be flooded with cheap shares as the issue will almost certainly decrease the value of his holding. Required: I. Calculate the value at which the share price is likely to settle after the rights issue. II. Explain whether the shareholder's complaint is justified with particular reference to the difference between the rights price and the current market price.
QUESTION TWO A. What is a financial market? B. The directors of a company are planning to undertake a rights issue. Describe the factors that should be taken into account in deciding whether to have this issue underwritten instead. C. D Plc is in the process of making a 1 for 4 rights issue. The rights letters have just been sent to shareholders. The company currently has 20m K1 shares in issue and the current market price is K4.50 per share. The rights letter gives shareholders the right to buy their new shares for K3.50 each. D Plc plans to use the cash raised to build a major extension to its factory, thereby doubling production capacity. The finance director has received an angry letter from a shareholder. The shareholder complains that he cannot afford to invest in new shares. He contends that he is likely to suffer a loss because of the fact that the market will be flooded with cheap shares as the issue will almost certainly decrease the value of his holding. Required: I. Calculate the value at which the share price is likely to settle after the rights issue. II. Explain whether the shareholder's complaint is justified with particular reference to the difference between the rights price and the current market price.
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
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Transcribed Image Text:QUESTION TWO
A. What is a financial market?
B. The directors of a company are planning to undertake a rights issue. Describe the
factors that should be taken into account in deciding whether to have this issue
underwritten instead.
C. D Plc is in the process of making a 1 for 4 rights issue. The rights letters have just
been sent to shareholders. The company currently has 20m K1 shares in issue
and the current market price is K4.50 per share. The rights letter gives
shareholders the right to buy their new shares for K3.50 each. D Plc plans to use
the cash raised to build a major extension to its factory, thereby doubling
production capacity. The finance director has received an angry letter from a
shareholder. The shareholder complains that he cannot afford to invest in new
shares. He contends that he is likely to suffer a loss because of the fact that the
market will be flooded with cheap shares as the issue will almost certainly
decrease the value of his holding.
Required:
I.
II.
Calculate the value at which the share price is likely to settle after the rights
issue.
Explain whether the shareholder's complaint is justified with particular
reference to the difference between the rights price and the current market
price.
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