The Cherry Tree Company has issued 300,000 $1 par equity shares, which are at present selling...

 

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The Cherry Tree Company has issued 300,000 $1 par equity shares, which are at present selling for $4.40 per share. The company needs toraise additional finance in order to undertake a new project which itplans to obtain via a 2 for 5 rights issue priced at $3.00. Required: (a) Calculate the theoretical ex-rights price of Cherry Tree's equity shares. (2 marks) (b) Calculate the theoretical value of a Cherry Tree right before the shares sell ex-rights. (2 marks) (c) The chairman of the companyreceives a telephone call from an angry shareholder who owns 1,000shares. The shareholder argues that he will suffer a loss in hispersonal wealth due to this rights issue, because the new shares arebeing offered at a price lower than the current market value. The chairman assures him that this wealth will not be reduced because of the rights issue, as long as the shareholder takesappropriate action. Is the chairman correct? What should the shareholder do? Prepare a statement showing the effect of the rights issue on this particular shareholder's wealth, assuming (i) he exercises his rights (ii) he sells all the rights (iii) he exercises half the rights and sells the other half (iv) he does nothing at all. (7 marks) (d) Are there any real circumstances which might lend support to the shareholder's claim? Explain. (5 marks) (e) Explain and evaluate the appropriateness of the following alternative methods of issuing equity finance: • a placing, • an offer for sale, . a public offer for subscription. The Cherry Tree Company has issued 300,000 $1 par equity shares, which are at present selling for $4.40 per share. The company needs toraise additional finance in order to undertake a new project which itplans to obtain via a 2 for 5 rights issue priced at $3.00. Required: (a) Calculate the theoretical ex-rights price of Cherry Tree's equity shares. (2 marks) (b) Calculate the theoretical value of a Cherry Tree right before the shares sell ex-rights. (2 marks) (c) The chairman of the companyreceives a telephone call from an angry shareholder who owns 1,000shares. The shareholder argues that he will suffer a loss in hispersonal wealth due to this rights issue, because the new shares arebeing offered at a price lower than the current market value. The chairman assures him that this wealth will not be reduced because of the rights issue, as long as the shareholder takesappropriate action. Is the chairman correct? What should the shareholder do? Prepare a statement showing the effect of the rights issue on this particular shareholder's wealth, assuming (i) he exercises his rights (ii) he sells all the rights (iii) he exercises half the rights and sells the other half (iv) he does nothing at all. (7 marks) (d) Are there any real circumstances which might lend support to the shareholder's claim? Explain. (5 marks) (e) Explain and evaluate the appropriateness of the following alternative methods of issuing equity finance: • a placing, • an offer for sale, . a public offer for subscription.

Answer rating: 100% (QA)

a TERP Market value MV of shares in issue 300000 440 1320000 Proceeds from new issue TERP 2 Number o... View the full answer