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:

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.

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Ordinary shares (25p nominal value) Reserves Current ordinary share price After-tax cost of capital Current earnings per share PXP £000 2,500 1,750 4,250 £5.10 per share 9 per cent 23p VVM £000 900 1,000 1,900 £2.50 per share 13 per cent 19p