Question 1 (30 Mark8) (Caplial structure declsion making, leaming unlts 7,13 and 14) Read the following case and then answer the required section below the case: Buldstf Ltd. Is a construction company which in the past had a large market capltallsation and tumover, but, after the great recession of the late 2000 's and the recent pandemic, finds Itself struggling to recover to lts past stature in the Industry. The company has, over the past decade, sold off or spun off all Its subdlvislons and Is now focussed solely on its core competency of managing and constructing shopping mals. Demand for new malls has dropped slnce 2010, however, there Is still some demand as the population of the country continues to urbanlse and more high-density residentlal development. takes place. This leads to the formation and movement of commerclal nodes to areas with higher population densities and the opportunlty to bulld or manage malls in these new nodes. The management of Bulldsturf' Ltd (from hereon, management) belleves that the company can operate in this environment and return healthy pronits. Management belleves in the turnaround plan and the prospects of the company and is sure that it will retum to beling a large competitor In lis industry, however, it Is not expected that the company will retum to lts slze pre the late 2000 's recession. The management wishes to ralse more funds to Implement the proposed tum-around plan. Below folows some financlal Information regarding the company: - Current number of shares in issue: 300 000 D00 - Current share price: 50c - Current capltal structure: Assets = R.150 D00 000; Llablitles = R140 000 D00; Equity = R10 DOO ODO - Current EEIT (operating profit) - R15 DOD DOD - Current Interest expense = R14 00D 000 - Tax rate: 28\% - Current beta: 1.9 - Risk free rate: 6\% - Market risk premium : 7\% The company has had to incur a lot of debt to stay anloat and is planning a rights Issue to ralse funds to repay some of its debts and to implement its turn-around plan. Management estimates that it needs R30 D00 000 over and above any retained earnings to implement the tumaround plan whlle they wish to lower lis debt by R.20 000000 in order to bring about better prontablilty due to reduced Interest payments, together with more future flexlbility. It is not expected that EBIT wou'd change for the foreseeable future and that any effect of the turn-around plan would only be felt later. The company would also immedlately use the R20 000000 to retire debt to that amount, whille the R30 000000 for the turn-around plan would be kept as cash Inltially. The Interest payment Is expected to fall in line (proportionally) with the reduction in the amount of debt| Required: a.) Determine the amount of funding that the company requires and the amount of rights the company would have to Issue if it is assumed that transaction and related costs 2 amount to 10% of the value of each right Issued, while it is expected that the Issue will be fully taken up and the price of a right is set to 20c. (4 Marks) b.) Show the journal entry (general ledger) that you would record for this transaction. Just the accounts and the amounts would sumfice. (2 Marks) c.) Calculate the theoretical price per share after the Issue and the WACC for the company after the rights issue. "HINT: equity wou'd be the theoretical price per share multipled by the new amount of shares outstanding (10 Marks) d.) Calculate the current ROE and the expected ROE after the rights lssue and compare the two. e.) Determine the EPS under the current structure and after the rights issue. Then argue from the perspectlve of an investor, whether you support the rights issue or not. Base your argument on the difference In EPS If you do not expect the company's EBIT to Increase for at least 5 years. i.) Consldering the broader case and not just the EPS, briefly argue for or against the rights issue and restructuring plan and provide at least one real-worid example of a company that used a rights lssue to ralse funds and the subsequent performance of the company to stanf your argument. (7 Marks) (You can use a Googie search or simllar to find cases and please reference the source you use. If not a news article or similar, you can refer to the share price of the company after the rights issue and reference where you found the share price.) Question 1 (30 Mark8) (Caplial structure declsion making, leaming unlts 7,13 and 14) Read the following case and then answer the required section below the case: Buldstf Ltd. Is a construction company which in the past had a large market capltallsation and tumover, but, after the great recession of the late 2000 's and the recent pandemic, finds Itself struggling to recover to lts past stature in the Industry. The company has, over the past decade, sold off or spun off all Its subdlvislons and Is now focussed solely on its core competency of managing and constructing shopping mals. Demand for new malls has dropped slnce 2010, however, there Is still some demand as the population of the country continues to urbanlse and more high-density residentlal development. takes place. This leads to the formation and movement of commerclal nodes to areas with higher population densities and the opportunlty to bulld or manage malls in these new nodes. The management of Bulldsturf' Ltd (from hereon, management) belleves that the company can operate in this environment and return healthy pronits. Management belleves in the turnaround plan and the prospects of the company and is sure that it will retum to beling a large competitor In lis industry, however, it Is not expected that the company will retum to lts slze pre the late 2000 's recession. The management wishes to ralse more funds to Implement the proposed tum-around plan. Below folows some financlal Information regarding the company: - Current number of shares in issue: 300 000 D00 - Current share price: 50c - Current capltal structure: Assets = R.150 D00 000; Llablitles = R140 000 D00; Equity = R10 DOO ODO - Current EEIT (operating profit) - R15 DOD DOD - Current Interest expense = R14 00D 000 - Tax rate: 28\% - Current beta: 1.9 - Risk free rate: 6\% - Market risk premium : 7\% The company has had to incur a lot of debt to stay anloat and is planning a rights Issue to ralse funds to repay some of its debts and to implement its turn-around plan. Management estimates that it needs R30 D00 000 over and above any retained earnings to implement the tumaround plan whlle they wish to lower lis debt by R.20 000000 in order to bring about better prontablilty due to reduced Interest payments, together with more future flexlbility. It is not expected that EBIT wou'd change for the foreseeable future and that any effect of the turn-around plan would only be felt later. The company would also immedlately use the R20 000000 to retire debt to that amount, whille the R30 000000 for the turn-around plan would be kept as cash Inltially. The Interest payment Is expected to fall in line (proportionally) with the reduction in the amount of debt| Required: a.) Determine the amount of funding that the company requires and the amount of rights the company would have to Issue if it is assumed that transaction and related costs 2 amount to 10% of the value of each right Issued, while it is expected that the Issue will be fully taken up and the price of a right is set to 20c. (4 Marks) b.) Show the journal entry (general ledger) that you would record for this transaction. Just the accounts and the amounts would sumfice. (2 Marks) c.) Calculate the theoretical price per share after the Issue and the WACC for the company after the rights issue. "HINT: equity wou'd be the theoretical price per share multipled by the new amount of shares outstanding (10 Marks) d.) Calculate the current ROE and the expected ROE after the rights lssue and compare the two. e.) Determine the EPS under the current structure and after the rights issue. Then argue from the perspectlve of an investor, whether you support the rights issue or not. Base your argument on the difference In EPS If you do not expect the company's EBIT to Increase for at least 5 years. i.) Consldering the broader case and not just the EPS, briefly argue for or against the rights issue and restructuring plan and provide at least one real-worid example of a company that used a rights lssue to ralse funds and the subsequent performance of the company to stanf your argument. (7 Marks) (You can use a Googie search or simllar to find cases and please reference the source you use. If not a news article or similar, you can refer to the share price of the company after the rights issue and reference where you found the share price.)