Below follows some financial information regarding the company:

Current number of shares in issue: 10 000 000

Current share price: R1.00

Current capital structure: Assets = R40 000 000; Liabilities= R50 000 000; Equity =

R10 000 000

Current EBIT (operating profit) = R3 000 000

Current interest expense = R5 000 000

Tax rate: 28%

Current beta: 1.9

Risk free rate: 4%

Market risk premium : 6%

The company has had to incur a lot of debt to stay afloat and is planning a rights issue to raise funds to repay some of its debts and to implement its turn-around plan. Management estimates that it needs R10 000 000 to implement the turnaround plan while they wish to lower its debt by R20 000 000 in order to bring about better profitability due to reduced interest payments, together with more future flexibility. It is not expected that EBIT would change for the foreseeable future and that any effect of the turn-around plan would only be felt later. The company would also immediately use the R20 000 000 to retire debt to that amount while the R10 000 000 for the turn-around plan would be kept as cash initially.

a. Calculate the theoretical price per share after the issue and the WACC for the company after the rights issue.

*HINT: equity would be the theoretical price per share multiplied by the new amount of shares outstanding

b. Calculate the current ROE and the expected ROE after the rights issue and compare the two.

c. Determine the EPS under the current structure and after the rights issue. Then argue from the perspective of an investor, whether you support the rights issue or not. Base your argument on the difference in EPS if you do not expect the company's EBIT to increase for at least 5 years.

d. Considering the broader case and not just the EPS, briefly argue for or against the rights issue and restructuring plan and provide at least one real-world example of a company that used a rights issue to raise funds and the subsequent performance of the company to staff your argument.