Shamrock Ltd is planning to raise N$11 200 000 through a rights issue. The new shares will be offered at a 20% discount to the current share price of Shamrock Ltd, which is N$3,50 per share. The rights issue will be on a 1 for 5 basis and issue costs of N$280 000 will be paid out of the cash raised. The capital structure of Shamrock Ltd is as follows:

Equity and Liability N$

Equity

Ordinary shares 10 000 000

Reserves 75 000 000

Total Equity 85 000 000

Non-current Liabilities

Development Bank Bonds 30 000 000

Total Equity and Liabilities 115 000 000

The net cash raised by the rights issue will be used to redeem part of the bonds. Each bond has a nominal value of N$100 and an ex-interest market value of N$104. A clause in the bond issue contract allows Shamrock Ltd to redeem the bonds at a 5% premium to market price at any time prior to their redemption date. The price/earnings ratio of Shamrock Ltd is not expected to be affected by the redemption of the bonds. The earnings per share of Shamrock Ltd is currently N$0,42 per share and total earnings are N$8 400 000 per year. The company pays corporation tax of 30% per year.

Required:

1.1 Evaluate the effect on the wealth of the shareholders of Shamrock Ltd of using the net rights issue funds to redeem the loan notes. (8)

1.2 Discuss whether Shamrock Ltd might achieve its optimal capital structure following the rights issue. (7)

1.3 Discuss three (3) sources and characteristics of long-term debt finance which may be available to Shamrock Ltd.