(a) Rights issue price 0·5
New shares issued 0·5
Net cash raised by rights issue 0·5
Theoretical ex rights price per share 1
Buy-back price of loan notes 0·5
Nominal value of loan notes redeemed 1
Before-tax interest saving 0·5
After-tax interest saving 0·5
Revised earnings 0·5
Revised earnings per share 0·5
Revised share price using price/earnings ratio method 1
Comment on effect of redemption on shareholders’ wealth 1
–––
8

(b) Traditional view of capital structure 1–3
Miller and Modigliani views of capital structure 1–3
Other relevant discussion 1–3
–––
Maximum 7