Answer to Question #245681 in Economics for fin

Question

• Number of shares in issue: 10 000 000

• share price: R1.00

• capital structure: Assets = R50 000 000; Liabilities= R40 000 000; Equity =

R10 000 000

• EBIT (operating profit) = R5 000 000

• t interest expense = R4 000 000

• Tax rate: 28%

• beta: 1.9

• Risk free rate: 3%

• Market risk premium : 5%

Company needs R10 000 000 to implement turnaround plan while they wish to lower its debt by R20 000 000 to bring about better profitability due to reduced interest payments. The company would also immediately use the R20 000 000 to retire debt to that amount while the R10 000 000 for the turn-around plan would be kept as cash initially.

a.)    Determine the amount of funding that the company requires and the amount of rights the company would have to issue if it is assumed that transaction and related costs amount to 10% of the value of each right issued, while it is expected that the issue will be fully taken up if the price of a right is set to 20c.

Answer 1

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