a) Briefly explain what is meant by Right Issue and explain its role in the Protection of Shareholders interests.

b) Briefly explain in Principle a Right Issue has NO impact on the Wealth of Shareholder, whether the Shareholder decides to invest in the issue or sell the Rights to acquire additional shares.

c) Carpets Direct plc wishes to increase the number of its Retail Outlets in the North America. The BOD has decided to finance the expansion programe by raising the funds from existing Shareholders through a 1 for 4 rights issue. The most recent Income Statement of the business as follows:

$m

Sales 164.5

Operating Profit 12.6

Interest (6.2)

Profit before Taxation 6.4

Taxation (1.9)

Profit for the Year 4.5

A $2m ordinary dividend has been paid in respect of the year.

The Share Capital consists of 120m ordinary shares with the Par Value of $0.50 per share. These are currently being traded on the Stock Exchange at a P:E Ratio of 22 times and the BOD has decided to issue the new shares at a discount of 20% on the current Market Value.

Required

i) Calculate the Theoretical Ex Right Price TERP of an Ordinary Share in Carpets plc.

ii) Calculate the Price at which the Rights in Carpet Direct plc are likely to be traded.

iii) Identify and evaluate, at the time of the Rights issue, each of the Options arising from the Rights Issue to an Investor who holds 4,000 shares before the Rights announcement.

iiii) Briefly Comment on the P: E Ratio of Carpets Direct plc.