Share Price and Issuance
Not what you're looking for?
The finance director of Jackson plc of Jackson plc has proposed that a rights issue is undertaken to put the company's finances on a sound basis. As a result of a decline in the company's share price the market value of its equity, its debt-equity ratio based on market values has increased significantly and stands well above its planned level. Two years ago when the company's share price was 250p the debt-equity ratio was below 0.5, but it is now 1.30. The company has 100m shares outstanding and the market price of its shares is 120p, giving its equity an aggregate value of £1.20 million compared with its debt of £1.56 million. It is planned to raise £45 million through the rights issue, with a subscription price set at a discount of 25 per cent to its current market price. The funds raised will be used to repay some of the company's borrowing. If the company does not reduce its debt it is likely to find it difficult to meet its interest payments over the next two years. The board of director is confident that they have implemented policies to restore the company's profitability but these will take two to three years to have a major impact.
a) i. Specify the terms of the issue and determine the theoretical ex-rights price, assuming that the announcement of the issue does not affect the share price, and the value of a right.
ii. Demonstrate that in principle a shareholder who decides to
1. Invest in the new shares
2. Sell her rights
Will not lose or gain from the transaction.
iii. Evaluate the contention that as the company's share price is well below its level two years ago this is not an appropriate time to undertake a new issue.
iv. Explain the view that even if the market can be expected to be surprised by the extent of the company's need for cash, and to react to the announcement by reducing the share price, it is still in the interests of the shareholders to proceed with the issue as long as the market price exceeds the subscription price.
b) Explain and assess the contention that a rights issue protects the interests of shareholders.
Purchase this Solution
Solution Summary
This Solution contains over 700 words and calculations to aid you in understanding the Solution to these questions.
Purchase this Solution
Free BrainMass Quizzes
Social Media: Pinterest
This quiz introduces basic concepts of Pinterest social media
Employee Orientation
Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.
Income Streams
In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.
Organizational Leadership Quiz
This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.
Understanding the Accounting Equation
These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.