Required:(a)Assuming a rights issue of shares is made, calculate:(i)the theoretical ex-rights price of an ordinary share in Devonian plc(ii)the value of the rights for each original ordinary share.(b)Calculate the price of an ordinary share in Devonian plc in one year’s time assuming:(i)a rights issue is made(ii)a loan issue is made.Comment on your findings. Devonian plc has the following long-term capital structure as at 30 November Year 4:£mOrdinary shares 25p fully paid50.0General reserve22.5Retained earnings25.598.0The business has no long-term loans.In the year to 30 November Year 4, the operating profit (profit before interest and taxation) was £40 million and it is expected that this will increase by 25 per cent during theforthcoming year. The business is listed on the London Stock Exchange and the share price as at 30 November Year 4 was £2.10.The business wishes to raise £72 million in order to re-equip one of its factories and is considering two possible financing options. The first option is to make a one-for-five rightsissue at a discount price of £1.80 per share. The second option is to take out a long-term loan at an interest rate of 10 per cent a year. If the first option is taken, it is expected that theprice/earnings (P/E) ratio will remain the same for the forthcoming year. If the second option is taken, it is estimated that the PIE ratio will fall by 10 per cent by the end of theforthcoming year.Assume a tax rate of 30 per cent.

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Required: (a)Assuming a rights issue of shares is made, calculate: (i)the theoretical ex-rights price of an ordinary share in Devonian plc (ii)the value of the rights for each original ordinary share. (b)Calculate the price of an ordinary share in Devonian plc in one year’s time assuming: (i)a rights issue is made (ii)a loan issue is made. Comment on your findings.

Required: (a)Assuming a rights issue of shares is made, calculate: (i)the theoretical ex-rights price of an ordinary share in Devonian plc (ii)the value of the rights for each original ordinary share. (b)Calculate the price of an ordinary share in Devonian plc in one year’s time assuming: (i)a rights issue is made (ii)a loan issue is made. Comment on your findings.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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