Evaluate FOUR features of preferenMaca Ltd. is considering raising funds for an expansion programme through a rights issue. The expansion programme is expected to cost Sh.20 million. The company has currently issued 2,400,000 ordinary shares which are currently selling for Sh.30 each. The board of directors have proposed an offer price of Sh.25 per share. The funds to be raised will be invested in a project which is expected to generate net operating cash flow of Sh.6,000,000 each year over the project's useful life of five years. The salvage value of the project after five years is estimated at Sh.5,000,000. The cost of capital for the firm is 12% per annum. Required: (i) Cum-right market price per share (MPS). (2 marks) (ii) Number of rights required to buy one new ordinary share. (1 mark) (iii) Theoretical ex-right market price per share. (2 marks) (iv) Theoretical value of each right. (2 marks) (v) Evaluate the impact of the rights issue on the value of wealth of an existing shareholder who owns 1,200 ordinary shares in the company and Sh.15,000 in his savings account under the various options available to him. (5 marks)

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Four features of preference shares are as follows 1 Fixed Dividend Preference shares typically come with a fixed dividend rate that must be paid out to shareholders before any dividends can be paid to ... View the full answer