BBC Co is a medium-sized manufacturing company which is considering a 1 for 5 rights issue at a 15% discount to the current market price of K4.00 per share. Issue costs are expected to be K220,000 and these costs will be paid out of the funds raised. It is proposed that the rights issue funds raised will be used to redeem some of the existing loan stock at par. Financial information relating to BBC Co is as follows:

 

Current statement of financial position

K'000             K'000

Non-current assets                                                                                     6,550

 

Current assets

Inventory                                                                              2,000

Receivables                                                                         1,500

Cash                                                                                     300

3,800

Total assets                                                                                                  10,350

 

 

 

 

 

Ordinary shares (par value 50n)                                      2,000

Reserves                                                                              1,500

12% loan notes 2X12                                                         4,500

 

Current liabilities

Trade payables                                                                    1,100

Overdraft                                                                               1,250

   2,350

Total equity and liabilities                                                                          10,350

 

Other information:

Price/earnings ratio of BBC Co: 15.24

Overdraft interest rate: 7%

Tax rate: 30%

Sector averages: debt/equity ratio (book value): 100%

Interest cover: 6 times

 

Required

 

(i) Ignoring issue costs and any use that may be made of the funds raised by the rights issue, calculate:

1. The theoretical ex rights price per share;

2. The value of rights per existing share. 

 

(ii) What alternative actions are open to the owner of 1,000 shares in BBC Co as regards the rights issue?

 Determine the effect of each of these actions on the wealth of the investor?