Cabby plc has a paid-up ordinary share capital of K1,500,000 represented by 6 million shares of K0.25 each. It has no loan capital. Earnings after tax in the most recent year were K1,200,000. The P/E ratio of the company is 12. The company is planning to make a large new investment which will cost K5,040,000, and is considering raising the necessary finance through a rights issue at K1.92.

Required

1. Explain what a rights issue means. (3 Marks)

2. Calculate the current market price of Cabby plcs ordinary shares. (8 Marks)

3. Calculate the theoretical ex rights price. (8 Marks)

4. State any three (3) advantages and three (3) disadvantages of raising finance through a rights issue. (6 Marks)