Moon plc has $90$ million $1$ ordinary shares in issue. The current stock market value of

these is $8$ per share. The management wants to choose from two rights issue options $(1)$

make a $1-$for$-3$ rights issue at $6$ each, and $(2)$ make a $1-$for$-2$ rights issue at $4$ each.

Assuming that the rights issue will be the only influence on the share price.

$($a$)$ Evaluate each of the options available to an investor with $900$ ordinary shares under a $1-$

for$-3$ rights issue and under a $1-$for$-2$ rights issue, respectively. Comparing two rights

issue options, which option will shareholders prefer and which one should managers

choose?

$(16$ marks$)$

$($b$)$ When evaluating an investment appraisal project, estimating the incremental cash flows

and cost of capital is often subject to significant uncertainty. Compare the different

approaches that deal with uncertainty in investment appraisals.

$(9$ marks$)$