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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.

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?

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FM – L2 – Q19 – Financial markets

Effect of NPV announcement on share price in a weak form efficient market.

A company’s board of directors makes a decision on 1st May to invest in a new project that will have an NPV of + GH₵4,000,000. The decision is announced to the stock market on 12th May.

The company has 50 million shares in issue and at close of trading on 30th April these had a market value of GH₵4 each.

Required:

(A). State what would happen to the share price of the company if the stock market has weak form efficiency

(B) State what would happen to the share price of the company if the stock market has semi-strong form efficiency.

(C). State what would happen to the share price of the company if the stock market has strong-form efficiency.

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FM – L2 – Q16 – Sources of finance: debt

Calculate value of convertible debentures and warrants for Amoah Plc and Bonsu Plc at expiry for given share prices.

Amoah Plc and Bonsu Plc each have in issue 2,000,000 ordinary shares of GH₵1 nominal value.
Amoah Plc also has GH₵2,500,000 of 12% convertible debentures in issue. Each GH₵100 of bonds is convertible into 20 ordinary shares at any time until the date of expiry of the bonds. If the bonds have not been converted by the expiry date, they will be redeemed at 105.
Bonsu Plc has 500,000 equity warrants in issue. Each warrant gives its holder an option to subscribe for 1 ordinary share at a price of GH₵5.00 per share. The warrants can be exercised at any time until the date of their expiry.
The shares of both companies, the convertible debentures, and the warrants are all actively traded in the stock market.

Required
(a) Calculate the value of each GH₵100 unit of convertible debentures of Amoah Plc and the value of each warrant of Bonsu Plc on the day of expiry, if the share price for each company at that date is:
(i) GH₵4.40
(ii) GH₵5.20
(iii) GH₵6.00
(iv) GH₵6.80

(b) Assume that the profit before interest and tax of both companies is GH₵1,200,000 and the rate of tax is 50%.

Calculate the earnings per share for:

(i) Amoah Plc, assuming that none of the convertible debentures are converted

(ii) Amoah Plc, assuming that all of the convertible debentures are converted

(iii) Bonsu Plc, assuming that none of the warrants are exercised

(iv) Bonsu Plc, assuming that all of the warrants are exercised

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