Reference no: EM132965791

Question: Nike Ltd has issued share capital of 4 million ordinary shares, with a par value of $1 each share. The board of the company has accepted the proposal for a new venture and therefore needs to raise $2 million.

The finance director has suggested that this finance be raised by way of a 1 for 4 rights issue which will be priced at a 30% discount to the current market price of $3 per share.

Required:
a) Calculate the theoretical ex-rights price per share;
b) Calculate the cash raised;
c) Calculate the value of the rights.

The finance director also recommended having the rights issue underwritten by an investment bank or relevant finance house at the time of issue.

d) Explain underwriting and consider whether underwriting is a valid expense at this time

e) An investment bank sponsoring an issue will usually charge a fee of between 2-4% of the issue proceeds and then pays part of that fee, 1.25-3% of the issue proceeds, to sub- underwriters.

What is the maximum fee that Cheltenham would accept as an underwriting fee if they wish to raise the required amount, net of underwriting costs?

f) Explain why, in general, rights issues are priced at a discount to the prevailing market price of the shares;

g) Calculate and discuss the factors that determine whether the actual ex-rights share price is the same as the theoretical ex-rights share price.

ACC501 Business Accounting And Finance

Question 1

i) Explain the role of (a) Corporate Accounting & (b) Corporate Finance in helping the economic growth of a nation.

ii) Is the wealth maximisation goal a short or long-term objective for firms? Explain.

iii) ‘Despite the diversity of financial roles and activities, an understanding of the need for ethics in finance is important in three major areas: Ethics is needed in financial markets, in the financial services industry and by finance people in organisations'. Explain this statement with clear examples.

Question 2

The primary financial objective of a company is stated by corporate finance theory to be the maximisation of the wealth of its shareholders but this objective is usually replaced by the surrogate objective of maximisation of the company's share price.

Required:
a) Discuss how this substitution can be justified.

As stated above in a) the primary financial objective of corporate finance is usually taken to be the maximisation of shareholder wealth.

Discuss what other objectives may be important to a company quoted on a stock exchange and whether such objectives are consistent with the primary objective of shareholder wealth maximisation.

Required:
b) Discuss this aspect generally but also in the light of a consideration that management wishes to keep the financial gearing level as low as possible, while shareholders would prefer it kept as high as possible.

Question 3

Companies finance their long-term needs through two routes, namely equity finance or debt finance.

Required:

Identify and critically discuss the various ways in which companies can access debt & equity finance. Also discuss the particular problems experienced by small companies with regards to this type of finance whilst highlighting any particular financing avenues which may be available to such companies in this respect.

Question 4

Mr Arsenal has the opportunity to invest in the shares of two companies - Tropicana plc and Waterfall plc. Tropicana plc is a tropical leisure wear manufacturer and Waterfall plc manufactures a range of adult and children's waterproof clothing. The return on both these companies is likely to be influenced by the state of the weather. The following table shows the return that can be expected from each company's shares for different weather conditions:

Required:

(a) Calculate the expected return and standard deviation of a 100% investment in Tropicana plc.

(b) Calculate the expected return and standard deviation of a 100% investment in Waterfall plc.

(c) Mr Arsenal is also considering combining both shares in a portfolio. Calculate the expected return and standard deviation for both of the following portfolio combinations if the covariance of Tropicana and Waterfall is -99.2

Explain to Mr Arsenal why investing in a portfolio is beneficial to a risk averse investor. Make reference to appropriate diagrams in your answer.

(d) Critically discuss the following statements about stock market efficiency:

i) The weak form of the efficient market hypothesis implies that it is possible to generate abnormal profit by analysing and finding patterns in part share price movements.

ii) The semi-strong form of the efficient market hypothesis implies that fund managers who study detailed publicly available information about a company, such as financial accounts and newspaper reports should be able to outperform the market.

iii) The strong form of the efficient market hypothesis implies that directors with privileged private information about a company are able to make superior returns.

*Note that "critically discuss" will require students to analyse further and expand comprehensively on the theory of stock market efficiency and not just describe the findings.

Attachment:- Business Accounting And Finance.rar