Globe Inc has issued share capital of 5,00,000, $1 ordinary shares, and the current share price is $3.8, in a market in which there is currently a general upward movement in share prices. Globe Inc EPS have been increasing at a relatively stable rate and were reported at $0.5 in the most recent annual report and accounts. Globe Inc is planning to redeem $400,000, 5% redeemable bonds by making a one for four rights issue of ordinary shares. However, the company does not want to dilute its EPS by more than 12%. The company also wants the rights issue shares to be priced around 10% below the current share price. The company's rate of corporate tax is 35%.

Required:

i. How many shares would be required and what is the lowest market price at which the company would consider making the issue?

ii. In theory what would be the resultant ex rights price of the shares, and the corresponding P/E ratio?

iii. Outline the reasons generally why a company may prefer to make a rights issue of ordinary shares as a way of raising new capital rather than long-term debt and explain whether there are circumstances in which a resulting dilution of earnings per share would be acceptable to shareholders.

Answer rating: 100% (QA)

Globe Inc Rights Issue Analysis i Number of Shares and Minimum Price A Calculate existing shares 500... View the full answer