Calculate the price per share required in a new public issue

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Reference no: EM1385144

Q The issued capital of Indiana Ltd.comprises of 100,000 ordinary shares of Rs. 100 each. It has no fixed interest capital. It has paid a dividend of Rs. 30 per share consistently over years and each share has a current market value of Rs. 270 cum dividend. The next dividend is due to be paid shortly. Earnings have been running at about the same level as dividends.

The directors are now considering a new investment proposal, requiring an outlay of Rs. 20,00,000, which is expected to yield a net cash inflow of Rs. 4,00,000 p.a. indefinitely. All additional net cash receipts could be used to increase dividend payments. Three sources of finance for the new project are under consideration:

(a) A reduction in the current dividend.

(b) A rights issue of one new share for every ten shares held, at Rs. 200 per share;and

Assume that the broad details of the directors' plan become known in the stock market (but were not known when the share price was Rs. 270).

Estimate the new price per share:

(a) If the current dividend is reduced; and

(b) If the rights issue are made

Calculate the price per share required in a new public issue if the entire surplus generated by the new project is to accrue to the existing shareholders.

Reference no: EM1385144

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