- 15 Marks
Question
James Obasi plc, a medium-sized drone manufacturing firm, is considering a 1-for-5 rights issue at a 15% discount to the current market price of N4.00 per share. Expected issue costs are N2 million, payable from the funds raised. The proceeds from the rights issue will be used to redeem some of the company’s existing bonds at par.
Financial Information:
Statement of Financial Position (N’000):
Required:
a. Ignoring issue costs and any use of the funds raised by the rights issue, calculate: i. The theoretical ex-rights price per share. ii. The value of rights per existing share. (4 Marks)
b. Identify the alternative actions available to an owner of 1,500 shares in James Obasi plc concerning the rights issue and determine the effect of each action on the investor’s wealth. (6 Marks)
c. Calculate the current earnings per share and the revised earnings per share if the rights issue funds are used to redeem some of the existing bonds.
(5 Marks)
Answer
b) A number of options are available to the owner of the 1,500 shares:
i) Do–nothing
ii) Take up the rights
The rights issue has a neutral effect if the additional shares are taken up
iii) Sell the rights
The rights issue also has a neutral effect on the investor‘s wealth.
iv) Sell some rights and take up the balance
If an investor does not want to gain or lose cash in a right issue, he can
sell some of the rights and then buy the balance of his rights. The
number of rights which should be sold is given by:
c) Calculation of EPS
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