QUESTION TWO (a) (b) Highlight two factors that are likely to affect the success of a rights issue. (c) QRS Limited is planning to expand its production capacity as per its marketing strategy as a result of access to new markets. The company requires additional capital of Sh.95,000,000 which it intends to raise through a rights issue. The company's financial year ends on 30 June. Additional information: The company's pre-tax profits for the year ended 30 June 2021 was Sh.177.500,000. This represents a 30% increase over the profits of the previous year. The current market price per share is Sh.12. The rights issue will comprise one share for every four shares held at a rights issue price of Sh.8 per share. The dividend per share for the year ended 30 June 2021 was Sh.0.70. The company expects to pay a dividend per share of Sh.0.90 for the year ending 30 June 2022. Corporate tax rate is 30%. I. 2. 3. 4. 5. Suggested answers available: www.someakenya.com/cpa-revision-kits Required: (0) Probability 0.30 The existing number of ordinary shares before the rights issue. The earnings per share (EPS) and price-earnings (P/E) ratio for the year ended 30 June 2021. (iii) The ex-rights price per share. The following data shows the returns of two stocks, A and B and their respective probabilities of occurrence: Returns of stock A (%) Returns of stock B (%) 10 8 7 13 0.30 0.40 (2 marks) Required: (i) (ii) (iii) The expected returns of stock A and stock B. The standard deviation of the returns of stock A and stock B. 12 CA22 Page 1 Out of 4 7 (1 mark) (4 marks) (3 marks) (2 marks) (3 marks) Suppose that a portfolio is created composed of 70% of stock A and 30% of stock B. Determine this portfolio's risk in terms of portfolio standard deviation. (5 marks) (Total: 20 marks)