Orion plc is an all-equity company with 240 million shares issued and a current share

price of 5.60. Having just received and reviewed its preliminary results for the year

ended 31 March 2022, the directors have decided to invest heavily in new technology.

This will require immediate long-term financing of 112 million. The funds can be

raised by one of two ways, either by a one-for-six rights issue at a deep discounted price

of 2.80 per share, or take out a 15 year debenture for the same amount. The debenture

will cost 15 million (gross) in interest each year. If the rights issue option is taken the

Price Earnings (PE) ratio is expected to remain at 14 times, while if the debenture issue

option is taken the PE ratio is predicted to decline to 13 times.

For the year to 31 March 2023 the company predicts a substantial growth in operating

profits (EBIT) to 180 million based on the benefits of the new investment and the

improving trading conditions. Operating profit for the year ended 31 March 2022 was

120 million. The company does not intend to make dividend payments during the year.

Assume a corporation tax rate of 20%.

Questions:

a) Assuming a rights issue of shares is made, calculate:

i. the theoretical ex-rights price of an ordinary share in Orion plc.

ii. the theoretical value of the rights for each original ordinary share.

b) Estimate the price of an ordinary share in Orion ple on 31 March 2023 assuming:

i. a rights issue was made during the year.

ii. a debenture issue was made.

c) Calculate the breakeven operating profit for a shareholder to be indifferent between the two methods of raising the required long-term capital.