PXP plc is a listed company that has made an offer of 3.20 per share for the

Question:

PXP plc is a listed company that has made an offer of £3.20 per share for the ordinary share capital of VVM plc. Details of the two companies are as follows:

Ordinary shares (25p nominal value) Reserves Current ordinary share price After-tax cost of capital Current

PXP is not sure whether to finance the offer by a rights issue or by an issue of bonds. It expects that, after the acquisition, it will make savings in after-tax operating costs of £250,000 per year. PXP pays tax on profits at a rate of 19 percent. If the price/earnings ratio of PXP remains constant, calculate the post-acquisition share price of PXP under the following methods of finance and comment on the effect on the wealth of its shareholders: 

1. A rights issue at an issue price of £4.00 per share; 

2. An issue of 12 percent bonds.

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question
Question Posted: