Pizza Shack plc operates a chain of pizza restaurants. The business started operations five years ago and has enjoyed uninterrupted and rapid growth. The directors, however, believe that future growth can be achieved only if the business seeks a listing on the London Stock Exchange. If the directors go ahead with a listing, the financial advisers to the business have suggested that an issue of ordinary shares by tender at a minimum price of £2.20 would be an appropriate method of floating the business. The advisers have suggested that 3 million ordinary shares should be issued in the first instance, although the directors of the business are keen to raise the maximum amount of funds possible.

Initial research carried out by the financial advisers suggests that the following demand for shares at different market prices is likely:

Required:

(a) Discuss the advantages and disadvantages of making a tender issue of shares.

(b) Calculate the expected proceeds from the tender issue, assuming the business (i) issues 3 million shares (ii) wishes to raise the maximum amount of funds possible.

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Share price 3.60 3.20 2.80 2.40 2.00 1.60 Number of shares tendered at each share price 000s 850 1,190 1,380 1,490 1,540 1,560 8,010