Reference no: EM133230387
Li has indicated to the board of directors that the company is fast running out of funds to survive and complete the housing contracts.
Given the downturn in the financial markets around the world, construction companies in particular are suffering from severe cash burn at the moment.
Li has indicated that Metrix only has sufficient cash at bank to fund 3 months of operations. Mario, Stephen and Li are looking at various funding options and are considering:
1. Continue trading and incurring further debt in the hope of riding out the financial storm.
2. A rights issue
3. Private placement to Paradise Merchant Bank Ltd, see below
The current shareholders of the company are:
Employees: 5% (15 staff)
Mario:12.5%
Stephen: 12.5%
Li: 2.5%
Tiger Investments Ltd 40% (an investment bank based in Malaysia,)
Paradise Merchant Bank Ltd: 27.5% (a venture capitalist) based in Melbourne.
There are 12,000,000 shares currently on issue. The current market price is $1.50 which represents a decrease of 30% since the beginning of the year. The valuation was prepared by your employer.
Megan advised the directors in the meeting that the price of a rights issue should be at a 30% discount to current market price. The rights issues should be in the following ratio: 1:3 (for every 3 ordinary shares owned 1 new share can be acquired under the rights issue.
When Tiger Investment Ltd and Paradise Merchant Bank Ltd acquired their interest in the company the share price was $12.45 per share.
Li estimates the company will need $15,000,000 within three months.
Mario, Stephen and Li have no spare cash to invest in the company and would be happy to reduce their holdings.
Issue they seek advice on:
What are the consequences if the company continues trading after the three months are up?
How much could Metrix raise by way of the rights issue assuming all the shareholders take up their entitlement?
What are the risks to them given the current economic and lack of confidence in the construction industry and financial markets turmoil?
What is a private placement and does the company need to issue any documents for this?