BBC Co is a medium-sized manufacturing company which is considering a 1 for 5 rights issue at
Question:
BBC Co is a medium-sized manufacturing company which is considering a 1 for 5 rights issue at a 15% discount to the current market price of K4.00 per share. Issue costs are expected to be K220,000 and these costs will be paid out of the funds raised. It is proposed that the rights issue funds raised will be used to redeem some of the existing loan stock at par. Financial information relating to BBC Co is as follows:
Current statement of financial position
K'000 K'000
Non-current assets 6,550
Current assets
Inventory 2,000
Receivables 1,500
Cash 300
3,800
Total assets 10,350
Ordinary shares (par value 50n) 2,000
Reserves 1,500
12% loan notes 2X12 4,500
Current liabilities
Trade payables 1,100
Overdraft 1,250
2,350
Total equity and liabilities 10,350
Other information:
Price/earnings ratio of BBC Co: 15.24
Overdraft interest rate: 7%
Tax rate: 30%
Sector averages: debt/equity ratio (book value): 100%
Interest cover: 6 times
Required
(i) Ignoring issue costs and any use that may be made of the funds raised by the rights issue, calculate:
1. The theoretical ex rights price per share;
2. The value of rights per existing share.
(ii) What alternative actions are open to the owner of 1,000 shares in BBC Co as regards the rights issue?
Determine the effect of each of these actions on the wealth of the investor?
Horngrens Accounting
ISBN: 978-0134674681
12th edition
Authors: Tracie L. Miller nobles, Brenda L. Mattison, Ella Mae Matsumura