(a) Lexbel plc generates earnings after tax (PAT) of 20 per cent on shareholders’ funds.
Its current capital structure is as follows: Ordinary shares of 50p each £300,000 Reserves £400,000 Total: £700,000
The board of Lexbel plc wishes to raise £180,000 from a right issue in order to expand existing operations. Its return on shareholders’ funds will be unchanged. The current ex- dividend market price of Lexbel plc is £1.90. Three different rights issue prices have been suggested by the finance director: £1.80, £1.60 and£1.40.
Determine: iv. form of the issue for each rights issue price
| Capital structure: | |
| Ordinary shares of 50 p each | 300000 |
| Reserves | 400000 |
| Total | 700000 |
| Raise £180,000 from a right issue | |
| The current ex-dividend market price - £1.90 | |
| When the shares were issued the price per share was £0.50 | |
| Three rights issue price suggested: £1.80, £1.60 and £1.40 | |
| The shares of Lexbel plc have a nominal value of 50 p per share | |
| book value | 300000 |
| Total Shares(300000/.5) | 600000 |
| Current market value (600000*1.90) | 1140000 |
| market value after rights Issue(1140000+180000) | 1320000 |
| Number of new shares | |
| at £1.80 = £180,000 / £1.80 | 100000 |
| at £1.60 = £180,000 / £1.60 | 112500 |
| at £1.40 = £180,000 / £1.40 | 128571 |
| form of the issue for each rights issue price | |
| = 1 / number of new shares × number of old shares | |
| At rights issue price of £1.80(1/100000*60000) | 6 |
| At rights issue price of £1.60(1/112500*60000) | 5.33 |
| At rights issue price of £1.40(1/128571*60000) | 4.67 |
| At rights issue price of £1.80 per 6 shares will be offered 1 new share. | |
| At rights issue price of £1.60 per 5.33 shares will be offered 1 new share. | |
| At rights issue price of £1.40 per 4.67 shares will be offered 1 new share. |
Question 1 –Long term finance: Equity finance (a) Lexbel PLCgenerates earnings after tax (PAT) of 20 per cent on shareholders’ funds. Its currentcapital structure is as follows:£Ordinary shares of 25p each300,000Reserves 400,000700,000The board of Lexbel PLCwishes to raise £180,000 from a right issue to expand existing operations. Its return on shareholders’ funds will be unchanged. The current ex-dividend market price of Lexbel PLCis £1.90. Three different rights issue prices have been suggested by the finance director: £1.80, £1.60,and £1.40.(a) Determine the:i.number of shares to be issued,ii.theoretical ex-rights price,iii. expected earnings per share andiv. form of the issue for each rights issue price, andv. Present your resu
(a) Lexbel plc generates earnings after tax (PAT) of 20 per cent on shareholders’ funds. Its...
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