Drumlin Co has $5m of $0·50 nominal value ordinary shares in issue. It recently announced a 1 for 4 rights issue at $6 per share. Its share price on the announcement of the rights issue was $8 per share.
What is the theoretical value of a right per existing share?
A. $1·60
B. $0·40
C. $0·50
D. $1·50
The following financial information relates to MFZ Co, a listed company:
| year | 2014 | 2013 | 2012 |
| profit before interest tax ($m) | 18.3 | 17.7 | 17.1 |
| profit after tax ($m) | 12.8 | 12.4 | 12.0 |
| dividends ($m) | 5.1 | 5.1 | 4.8 |
| equity market value ($m) | 56.4 | 55.2 | 54.0 |
MFZ Co has 12 million ordinary shares in issue and has not issued any new shares in the period under review. The company is financed entirely by equity, and is considering investing $9•2 million of new finance in order to expand existing business operations. This new finance could be either long-term debt finance or new equity via a rights issue. The rights issue price would be at a 20% discount to the current share price. Issue costs of $200,000 would have to be met from the cash raised, whether the new finance was equity or debt.
The annual report of MFZ Co states that the company has three financial objectives:
| objective 1: to achieve growth before interest and tax of 4% per year. |
| objective 2: to achieve growth in earnings per share of 3.5% per year . |
| objective 3: to achieve total shareholder return of 5% per year. |
Required:
(c) Calculate the theoretical ex rights price per share for the proposed rights issue. (5 marks)
The following financial information relates to MFZ Co, a listed company:
| year | 2014 | 2013 | 2012 |
| profit before interest tax ($m) | 18.3 | 17.7 | 17.1 |
| profit after tax ($m) | 12.8 | 12.4 | 12.0 |
| dividends ($m) | 5.1 | 5.1 | 4.8 |
| equity market value ($m) | 56.4 | 55.2 | 54.0 |
MFZ Co has 12 million ordinary shares in issue and has not issued any new shares in the period under review. The company is financed entirely by equity, and is considering investing $9•2 million of new finance in order to expand existing business operations. This new finance could be either long-term debt finance or new equity via a rights issue. The rights issue price would be at a 20% discount to the current share price. Issue costs of $200,000 would have to be met from the cash raised, whether the new finance was equity or debt.
The annual report of MFZ Co states that the company has three financial objectives:
| objective 1: to achieve growth before interest and tax of 4% per year. |
| objective 2: to achieve growth in earnings per share of 3.5% per year . |
| objective 3: to achieve total shareholder return of 5% per year. |
Required:
Discuss the sources and characteristics of long-term debt finance which may be available to MFZ Co (8 marks) (25 marks)
Bar Co is a stock exchange listed company that is concerned by its current level of debt finance. It plans to make a rights issue and to use the funds raised to pay off some of its debt. The rights issue will be at a 20% discount to its current ex-dividend share price of $7·50 per share and Bar Co plans to raise $90 million.
Bar Co believes that paying off some of its debt will not affect its price/earnings ratio, which is expected to remain constant.
| income statement information | |
| $m | |
| turnover | 472 |
| cost of sales | 423 |
| ----- | |
| profit before interest and tax | 49 |
| interest | 10 |
| ----- | |
| profit before tax | 39 |
| tax | 12 |
| ----- | |
| profit after tax | 27 |
| ----- | |
| statement of financial position information | |
| $m | |
| equity | |
| ordinary shares ($1 nominal) | 60 |
| reserves | 80 |
| ----- | |
| 140 | |
| long-term liabilities | |
| 8% bonds ($100 nominal) | 125 |
| ----- | |
| 265 | |
| ----- |
The 8% bonds are currently trading at $112·50 per $100 bond and bondholders have agreed that they will allow Bar Co to buy back the bonds at this market value. Bar Co pays tax at a rate of 30% per year.
Required:
(a) Calculate the theoretical ex rights price per share of Bar Co following the rights issue.
(b) Calculate and discuss whether using the cash raised by the rights issue to buy back bonds is likely to be financially acceptable to the shareholders of Bar Co, commenting in your answer on the belief that the current price/earnings ratio will remain constant.