Question 04:

(a) A company has on issue $30 000 ordinary shares fully paid to $2 each. It wishes to raise an additional $500 000, using one of the following alternatives:

(i) Issue of ordinary shares at $2 each

(ii) Raise half by ordinary share issue and half by 10% debentures

(iii)Issue 10% debentures

The company can expect earnings before interest and taxes to remain at $120 000 under each choice of finance. Company tax is 27.5%.

Required: What are the earnings per share under each alternative?

(b) The price of Ergo ltd shares at the beginning of the year was $3.20 and at the end was $3.55, while the company declared dividends totalling $0.25 during the year.

Required: Calculate the shareholders' Return on Investment

(c) Preston Ltd has an issued and paid up capital of $9,000,000 ordinary $1 shares. The board of directors decided to raise an additional $2,000,000 capital funds by a one for nine rights issue at a subscription price of $2.00 per share. The current market price of issued shares is $5.00.

Required:

(i) Calculate the theoretical value of one right necessary to acquire one new share.

(ii) Calculate the theoretical ex-right price per share.