Corporate Finance Assignment

21.1) Given,              Nelson Company

Market price of share (P_O) = $32

Subscription price of share (Ps) = $ 20

Right Share issued one for every three share

Value of each right =?

 

 

 

 

 

= $ 3

 

 

21.3) Given,                 Arlene Jackson's Company

Market price per share (MPS) = $35

Subscription price of share (P_S) = $20

Right share issued (α) = 5 shares

Total number of share = 490 shares

Cash in hand = $ 2000

1. What is the value of each right?
   

   Value of each right (V_r) = =2.5
   

 

 

1. Preparing statement showing Jackson's total assets
   
   1. She exercises all rights.
      

Before Offering			After Offering
Assets	Amount		Assets	Amount
Share capital Investment (490 x $ 35)	$17150		Share Capital Investment (588 x $32.5)	$19110
Cash	$ 2000		Cash (2000 – 1960)	$ 40
Total Assets	$ 19150		Total Assets	$ 19150

 

Working

New Share

New Share Value = Old Value – Each Right Value

    = 35 – 2.5

    = $ 32.5

Total Share     = 98 + 490

        = 588 shares.

Total cost of 98 share = 98 x 20

        = $ 1960

 

 

 

 

 

 

 

1. She sells all her rights
   

   After Offering
   

Assets	Amount
Share capital Invest (490 x $32.5)	$ 15925
Cash : Sale of right 490 rights @ $ 2.5	$ 1225
Original Cash	$ 2000
Total Assets	$ 19150

 

1. She sells 400 rights and exercise 90 rights.
   

After Offering

Assets	Amount
Share capital Investment 508 x $ 32.5	$ 16150
Cash : Sale of right 400 x $ 2.5	$ 1000
Original Cash	$ 1640
Total Assets	$ 19150

 

 

21.3 (iii) Working,

New Share =

Cost of New Share = 18 x $20 = 360

Remain Cash balance = 2000 – 360 = $1640

Total number of shares after right issued = 490 + 18 = 588 Shares

 

1. She neither sells nor exercises the rights.
   

Assets	Amount
Share capital Investment (490 x $32.5)	$ 15925
Cash	$ 2000
Total Assets	$17925

 

Total Asset reduced by $ 1225 when shares were neither sold nor exercised.

 

21.4 Given,                 Miller Company

Additional fund required = $ 5 million

Earning of additional fund = 10.5%

Price earning ration (P/E ration) = 15 times

Dividend payout ratio (DPS) = 56%

Tax rate (T) = 40 %

Assuming subscription prices of $ 25, $ 50, and $ 80 a share

1. How man additional shares of stock will have to be sold?
   

 

When share issued at $ 25

When share issued at $ 50

When share issued at $ 80

1. How many rights are required to purchase one new share?
   

Number of right required =	If PS = $25	If PS = 50	If PS = 80
	= = 0.5 1 old share = 2 new shares	= = 1 1 old = 1 new shares	= = 1.6 1 old = 1.6 new shares

    

 

21.4 (3) What will be the new earnings per share?

The Miller Company Income Statement

Particulars	PS= $25	PS = 50	PS = $80
Total earnings ( $1470,000 + 500000 x 10.5%)	$ 19,95,000	$19,95,000	$ 19,95,000
Interest on debt	$ 420,000	$ 420,000	$420,000
Income before tax	$1575,000	$1,575,000	$1,575,000
Taxes (40%)	$ 630,000	$630,000	$630,000
Earning after tax	$945000	$945000	$ 945000
No. of Share = 100,000 Old shares +	=100000 + = 300,000 share	=100000 + = 200,000 share	=100000 + = 162,500 share
New Earning per share =	= =$3.15	= =$4.725	= =$5.82
(4)Market price per share (MPS)= P/E ratio x EPS (P/E ratio is 15 times)	= 15 x 3.15 = 47.25	= 15 x 4.725 = $ 70.875	= 15 x 5.82 = $ 87.23
(5)Dividend per share = EPS x 56%	= 3.15 x 0.56=1.76	= 4.72 x 0.56=2.65	=5.82 x 0.56=3.26

21.4 (b)

Value of the position after offering

New Share=Req new + 100 = = 300 share   = 300 x 47.25 = 14,175

= =200 shares   = 200 x 70.875 = 14175

= =162.5 shares   = 162.5 x 87.23 = 14175