Q3.Maltby plc, a company quoted on London Stock Exchange, has been making regular annual after-tax profits of 7000,000 for some years and has the following ong-term capital structure: The debenture issue is not due to be redeemed for some time and the company has become increasingly concerned about the need to continue paying interest at 16% when the interest rate on newly issued government stock of a similar maturity is only 7%. A proposal has been made to issue 2,000,000 new shares in a rights issue, at a discount of 20% to the current share price of Maltby plc, and to use the funds raised to pay off part of the debenture issue. The current share price of Maltby plc is 3.50 and the current market price of the debentures is 112 per 100 block. - Alternatively, the funds raised by the rights issue could be invested in a new project giving an annual after-tax return of 20%. Whichever option is undertaken, the stock market view of the company's prospects will be unchanged and its P/E ratio will remain unchanged. Maltyby plc pays corporation tax at a rate of 31%. - By considering the effect on the share price of the two alternative proposals, discuss whether the proposed rights issue can be recommended as being in the best interests of the ordinary shareholders of Maltby plc. Your answer should include all relevant calculations. Question 4 - The financial manager of Longar plc is considering the purchase of of a finishing machine which will improve the appearance of the company's range of decorated fudges. She expects that the improved output will lead to increase sales of 110,000 per year for a period of five years. At the end of the five-year period, the machine will be scrapped. Two machines are being considered and the relevant financial information on the capital investment proposal form is as follows: - The following forecasts of average annual rates of inflation have been prepared by the planning department of Logar plc: - Sales prices: 6% per year - Labour costs: 5% per year - Power costs: 3\% per year - Logar plc pays corporation tax of 31% one year in arrears and has a nominal aftertax cost of capital of 15%. Capital allowances are available on a 25% reducing balance basis. - Advise the financial manager of Logar plc on her choice of machine. Narhino R Ine NPV tor machne B Is 9U,6