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What is the new market value of the company

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(a) Downing plc. is proposing a rights offering. Currently there are 350,000 shares outstanding at £85 each. There will be 70,000 new shares offered at £70 each.

Required:

(i) What is the new market value of the company?

(ii) How many rights are associated with one of the new shares?

(iii) What is the ex-rights price?

(iv) What is the value of a right?

(v) Ignoring regulations, why might a company have a rights offering rather than a general cash offer?

(b) Moon plc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 60 % debt. Currently there are 4,000 shares outstanding, and the share price is £80. EBIT is expected to remain at £20,000 per year for ever.

The interest rate on new debt is 5 %, and there are no taxes. Assume that the firm has a dividend payout rate of 100 %.

Required:

(i) Ms. Bisping, a shareholder of the firm, owns 200 shares of equity. What is her cash flow under the current capital structure?

(ii) What will Ms. Bisping's cash flow be under the proposed capital structure of the firm? Assume that she keeps all 200 of her shares. (iii) Suppose Moon does convert, but Ms. Bisping prefers the current all-equity capital structure. Show how she could unlever her shares to recreate the original capital structure.

Reference no: EM132758955

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