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QUESTION 4 (a) ABC Ltd. has decided to raise capital via a rights issue. The share price is currently K5.50 and ABC intends to raise K5m. There are currently 6.25m shares in issue and ABC is offering a 1 for 5 rights issue. Calculate the Ex-Rights Price. marks) ( (7 (b) BBC Co is a medium-sized manufacturing company which is considering a l for 5 rights issue at a 15% discount to the current market price of K4.00 per share. Issue costs are expected to be K220,000 and these costs will be paid out of the funds raised. It is proposed that the rights issue funds raised will be used to redeem some of the existing loan stock at par. Financial information relating to BBC Co is as follows: Current statement of financial position K'000 K'000 Non-current assets 6,550 Current assets Inventory Receivables Cash 2,000 1,500 300 3.800 Total assets 10.350 10.350 Ordinary shares (par value 50n) Reserves 12% loan notes 2X12 2.000 1,500 4.500 Current liabilities Trade payables Overdraft 1,100 1.250 2.350 Total equity and liabilities 10.350 Other information: Price/earnings ratio of Tirwen Co: 15.24 Overdraft interest rate: 7% Tax rate: 30% Sector averages: debt/equity ratio (book value): 100% Interest cover: 6 times Required (1) Ignoring issue costs and any Lise that may be made of the funds raised by the rights issue, calculate: 1. the theoretical ex rights price per share; 2. the value of rights per existing share. (3 marks each) (ii) What alternative actions are open to the owner of 1,000 shares in BBC Co as regards the rights issue? Determine the effect of each of these actions on the wealth of the investor (6 marks) (111) Calculate the current earnings per share and the revised earnings per share if the rights issue funds are used to redeem some of the existing loan notes. (6 marks) (Total: 25 marks)