- 15 Marks
FM – L2 – Q29 – Sources of finance: equity
Calculate the theoretical ex-rights price per share for Kumasi Lubricants Plc's rights issue to fund new equipment.
Question
Kumasi Lubricants Plc wishes to increase its production capacity by purchasing additional plant and equipment at a cost of GH¢3.8 million. The abridged statement of profit or loss for the year ended 30th November 20X6 is as follows:
| GH¢m | |
|---|---|
| Sales turnover | 140.6 |
| Profit before interest and taxation | 8.4 |
| Interest | 6.8 |
| Profit before tax | 1.6 |
| Tax | 0.4 |
| Profit after taxation | 1.2 |
Earnings per share: 15 cents
In order to finance the purchase of the new plant and equipment, the directors of the company have decided to make a rights issue equal to the cost of the equipment. The shares are currently quoted on the stock exchange at GH¢2.70 per share and the new shares will be offered to shareholders at GH¢1.90 per share.
Required:
(a) Calculate:
(i) the theoretical ex-rights price per share
(ii) the value of the rights on each existing share
(iii) Existing P/E ratio = GH¢2.70 / GH¢0.15 = 18.0
(b) What are the options available to a shareholder who receives a rights offer from a company?
Find Related Questions by Tags, levels, etc.
- Tags: Equity financing, Rights issue, Shareholder options, Stock market
- Level: Level 2
- Topic: Sources of finance: equity
