Disco Ltd is financed by 31 million shares of equity with a market capitalisation of 74.4 million, and debt with a face value and market value of 30 million. The interest rate on the debt is 7.5% and debt interest is tax deductible. The firms most recent earnings before interest and tax is 16.25 million. The corporate tax rate is 21%. There are no market imperfections apart from corporate tax.

1. What are Discos current earnings per share, share price, and cost of equity (return on equity)?

Suppose the firm decides to change its capital structure by holding a rights issue to raise enough cash to reduce the debt to 15 million. The rights price will be at a 20% discount off the current share price.

2. How many new shares must be issued in the rights issue? What will be the new earnings per share?

3. What is Discos share price following the rights issue?
4. What is Discos cost of equity following the rights issue? Has it changed? Why/why not?