Reference no: EM132468715
(a) PG Co has a paid-up ordinary share capital of $4,500,000 represented by 6 million shares of ?
It has no loan capital. Earnings after tax in the most recent year were $3,600,000. The PiE ratio of the company is 15. The company is planning to make a large new investment which will cost $10,500,000, and is considering raising the necessary finance through a rights issue at 800c.
Required
Question (i) Calculate the current market price of PG Co's ordinary shares.
Question (ii) Calculate the theoretical eat-rights price, and state what factors in practice might invalidate your calculation.
Question (iii) Briefly explain what is meant by a deep-discounted rights issue, identifying the main reasons why a company might raise finance by this method.
(b) As an alternative to a rights issue, PG Co might raise the $10,500,000 required by means of an issue of convertible loan notes at par, with a coupon rate of 6%. The loan notes would be redeemable in seven years' time. Prior to redemption, the loan notes may be converted at a rate of 11 ordinary shares per $100 nominal loan notes.
Required
Question (i) Explain the term conversion premium and calculate the conversion premium at the date of issue implicit in the data given.
Question (ii) Identify the advantages to PG Co of issuing convertible loan notes instead of the rights issue to raise the necessary finance.
Question (iii) Explain whythe market value of convertible loan notes is likely to be affected bythe dividend policy of the issuing company.
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