- 10 Marks
FM – L2 – Q28 – Sources of finance: equity
Question
A company, Kofi Enterprises Plc, wishes to increase its production capacity by purchasing additional plant and equipment. Its statement of profit or loss for the year ended 30th November Year 3 is as follows:
| GH¢m | |
|---|---|
| Sales revenue | 224 |
| Profit before interest and taxation | 45.5 |
| Interest | 11.4 |
| Profit before tax | 34.1 |
| Tax | 7.7 |
| Profit after tax | 26.4 |
Earnings per share: GH¢0.30
To finance the new investment, Kofi Enterprises Plc will make a 1 for 4 rights issue. The shares are currently quoted on the Stock Exchange at GH¢5.50 per share and the new shares will be offered to shareholders at GH¢4.50 per share.
Ignore the transaction costs of the share issue.
Required:
(A) Calculate the theoretical ex-rights price per share.
(B) Calculate the value of the rights on each existing share.
Answer
(A) Theoretical ex-rights price:
| Value of rights | GH¢ |
|---|---|
| Current market price | 5.50 |
| Theoretical ex-rights price | 5.30 |
| Value of rights | 0.20 |
This is the theoretical value of the rights, for each existing share.
(B) Value of the rights:
| Value of rights | GH¢ |
|---|---|
| Current market price | 5.50 |
| Theoretical ex-rights price | 5.30 |
| Value of rights | 0.20 |
This is the theoretical value of the rights, for each existing share.
- Tags: Equity financing, Rights issue, Share valuation, Stock exchange, Value of rights
- Level: Level 2
- Topic: Sources of finance: equity
- Uploader: Samuel Duah