Hisa Limited has 1 million ordinary shares outstanding at the current market price of Sh.50 per Share. The company requires Sh. 8 million to finance a...

      

Hisa Limited has 1 million ordinary shares outstanding at the current market price of Sh.50 per Share. The company requires Sh. 8 million to finance a proposed expansion project. The board of directors has decided to make a one for five rights issue at a subscription price of Sh. 40 per share.
The expansion project is expected to increase the firm’s annual cash inflow by Sh. 945,000.
Information on this project will be released to the market together with the announcement of the rights issue.
The company paid a dividend of Sh. 4.5 in the previous financial year. The dividend, together with the company’s earnings is expected to grow by 5% annually after investing in the expansion project
Required:
i) Compute the price of the shares after the commencement of the rights issue but before they start selling ex-rights
ii) Compute the theoretical ex-rights price of the shares.
iii) Compute the theoretical value of the rights when the shares are selling rights on.
iv) What would be the cum-rights price per share if the new funds are used to redeem a Sh. 8 million 10% debenture at par? (Assume a corporation tax rate of 30%)

  

Answers


Kavungya
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Cum rights MPS = Current MPS -PV interest tax shield lost

= Sh 50 – 1.70

= Sh 48.30

Kavungya answered the question on April 5, 2022 at 12:02


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