A company has announced a rights issue of 1 new share for every 4 existing shares.
Relevant data:
* The current market price per share is $10.00.
* Rights are to be issued at a 20% discount to the current price.
* The rate of return on the new funds raised is expected to be 10%.
* The rate of return on existing funds is 5%.
What is the yield-adjusted theoretical ex-rights price?
Give your answer to two decimal places.
$ ?

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A company has 6 million shares in issue. Each share has a market value of $4.00.
$9 million is to be raised using a rights issue.
Two directors disagree on the discount to be offered when the new shares are issued.
* Director A proposes a discount of 25%
* Director B proposes a discount of 30%
Which THREE of the following statements are most likely to be correct?

• A.The terms of the rights issue will be one new share for every two existing shares under Director A's proposal.
• B.More shares will be issued under Director B's proposal than under Director A's proposal.
• C.The rights issue price will be $3.00 under Director A's proposal.
• D.The theoretical ex-rights price will be higher under Director B's proposal than under Director A's proposal.
• E.Shareholder wealth will be higher under Director A's proposal than under Director B's proposal.

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Company B is an all equity financed company with a cost of equity of 10%.
It is considering issuing bonds in order to achieve a gearing level of 20% debt and 80% equity.
These bonds will pay a coupon rate of 5% and have an interest yield of 6%.
Company B pays corporate tax at the rate of 25%.
According to Modigliani and Miller's theory of capital structure with tax, what will be Company B's new cost of equity?
A)

B)

C)

D)

• A.Option C
• B.Option D
• C.Option A
• D.Option B

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Company A, a listed company, plans to acquire Company T, which is also listed.
Additional information is:
* Company A has 100 million shares in issue, with market price currently at $8.00 per share.
* Company T has 90 million shares in issue,. with market price currently at $5.00 each share.
* Synergies valued at $60 million are expected to arise from the acquisition.
* The terms of the offer will be 2 shares in A for 3 shares in B.
Assuming the offer is accepted and the synergies are realised, what should the post-acquisition price of each of Company A's shares be?
Give your answer to two decimal places.
$ ? .

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A company is considering the issue of a convertible bond compared to a straight bond issue (non- convertible bond).
Director A is concerned that issuing a convertible bond will upset the shareholders for the following reasons:
* it will dilute their control
* the interest payments will be higher therefore reducing liquidity
* it will increase the gearing ratio therefore increasing financial risk Director B disagrees, and is preparing a board paper to promote the issue of the convertible bond rather than a non-convertible.
Advise the Director B which THREE of the following statements should be included in his board paper to promote the issue of the convertible bond?

• A.When converted into shares, the company will receive a cash inflow which can be used for future investments.
• B.The coupon rate on the convertible bond will be lower than that on a non-convertible bond.
• C.Issuing a convertible bond will have a more favourable impact on the gearing ratio than a non- convertible bond.
• D.Over the life of the bond, a convertible will be more expensive than a non-convertible.
• E.The convertible bond may not dilute control as the bond holder has an option to choose conversion.

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