Exercice :

TOP Co is planning to by HOP Co$,$ a company in the same business sector, and is considering paying cash for the shares of the company. The cash would be raised by the TOP Co through a $1$ for $3$ rights issue at a $20\%$ discount to its current share price.

The purchase price of the $1$ million issued shares of HOP Co would be equal to the rights issue funds raised, less issue costs of $320,000.$ Earnings per share of HOP Co at the time of acquisition would be $44\mathrm{.}8$ cents per share. As a result of acquiring HOP Co$,$ TOP Co expects to gain annual after$-$tax savings of $96,000.$

TOP Co maintain a payout ratio of $50\%$ and earnings per share are currently $64$ cents per share. Dividend growth of $5\%$ p$.$a$.$ is expected for the foreseeable future and the company has a cost of equity of $12\%$ p$.$a$.$

Financial information from TOP Co statement of financial position:

$000$

Statement of financial position information:

$-$ Equity & Liabilities

$-$ Ordinary shares $(1$ par value$)3,000$

$-$ Reserves $4,300$

$-$ Equity, Total $7,300$

Non$-$current liabilities :

$-8\%$ Bank loan notes $5,000$

$-$ Current liabilities, Total $2,200$

$-$ Equity & Liabilities, Total $14,500$

ADDITIONAL DATA FOR CALCULATIONS :

$-$ TOP Co dividend per share $0\mathrm{.}32$ per share

$-$ Share price of TOP Co $4\mathrm{.}80$

$-$ Market capitalisation of TOP Co $14\mathrm{.}4$ million $$

$-$ Price$/$Earnings ratio of TOP Co $7\mathrm{.}5$

Assuming the rights issue takes place and ignoring the proposed use of funds raised, calculate:

$1.$ Current earnings per share before rights issue for TOP Co$!$

Question $1$ : Select one:

a$\mathrm{.}0\mathrm{.}64$

b$\mathrm{.}0\mathrm{.}75$

c$\mathrm{.}4\mathrm{.}80$

d$\mathrm{.}0\mathrm{.}32$

e$\mathrm{.}7\mathrm{.}5$

Assuming the rights issue takes place and ignoring the proposed use of funds raised, calculate:

$2.$ Number of new shares issued by TOP Co$!.$ Question $2$Select one:

a$\mathrm{.}1$ million new shares

b$\mathrm{.}2$ million new shares

c$\mathrm{.}3$ million new shares

d$\mathrm{.}4$ million new shares

e$\mathrm{.}333333$ new shares