Alders Limited has three million ordinary $1 shares on issue and has decided to make a 1 for 3 renounceable rights issue at $1.85 to finance expansion into the Perth and Brisbane markets. Ware Partners will underwrite the issue for $40,000. Immediately following the announcement of the issue, Alders were trading at $2.25.

Ware Partners have also advised Alders that if the current share market remains 'depressed', then they should consider a convertible note issue to finance any further expansion programs.

a, What is the theoretical value of the rights and of Alders'

b. A shareholder of Alders has complained that 'as an equity holder I feel that the company should fully utilise internal sources of funds, since when it makes a rights issue the share price falls

and I am worse off'

c, Advise the director of Alders as to why companies issue convertible notes as a means of raising additional finance