Question 2:

Innovative Solutions Limited, a company listed at the Securities Exchange is planning to raise Sh. 110 Million through a rights issue. The new shares will be offered at a 20% discount to the current share price of which is Sh. 35 per share. The rights issue will be on a 1 share for every 5 and issue costs will be Sh. 2,800,000 (will be paid out of the cash raised).

The funds raised will be used to pay off a loan that had been borrowed 3 years ago essentially eliminating debt from the capital structure.

Discuss the effect that the rights issue will have on: -

The voting rights of the shareholders

The shareholders who will not take up the rights

The overall cost of capital

The value of the shares

The Debt/Equity ratio and comment if a rights issue would be the optimal solution to the elimination of debt.

Currency used is the Kenyan Shilling