Mayo plc is financed by 31 million shares of equity with a market capitalisation of 74.4 million,
Question:
Mayo plc is financed by 31 million shares of equity with a market capitalisation of £74.4 million, and debt with a face value and market value of £30 million. The interest rate on the debt is 7.5% and debt interest is tax deductible. The firm’s most recent earnings before interest and tax is £16.25 million. The corporate tax rate is 21%. There are no market imperfections apart from corporate tax.
- What are Mayo’s current earnings per share, share price, and cost of equity (return on equity)?
Suppose the firm decides to change its capital structure by holding a rights issue to raise enough cash to reduce the debt to £15 million. The rights price will be at a 20% discount off the current share price.
- How many new shares must be issued in the rights issue? What will be the new earnings per share?
- What is Mayo’s share price following the rights issue?
What is Mayo’s cost of equity following the rights issue? Has it changed? Why/why not?
Macroeconomics
ISBN: 978-1319120054
3rd Canadian edition
Authors: Paul Krugman, Robin Wells , Iris Au , Jack Parkinson