GN Co plans to invest in a European storage, packing, and distribution network. The investment will cost €13m and is to be financed by equal amounts of equity and debt.
The equity finance will be an immediate rights issue in GN’s home country to raise $5m after issue costs of $300,000. GN’s current share price is $2.50 per share and the rights issue would be made at a 20% discount.
How many shares will GN Co need to sell in the rights issue?
A. 2.65m
B. 2.50m
C. 2.12m
D. 5.30m
I chose B, but the correct answer is A ($5m + $0.3m = $5.3m => $5.3m/$2 = 2.65m). However, the question said that $5m is after the issue cost of $0.3m, which means the final funds required of $5m is after deducting $0.3m, isn't it? So the number of shares should be 2.5m
Looking forward to your response, Iniss.
Ask the Tutor ACCA FM
ACCA Study Hub - Risk Management - GN Co
2y ago#1I think the issue costs need to be taken into account
The amount to be raised is $5m + 0.3m /$2 = $2.65
It means you need 5m plus to pay the issue cost
It doesn’t mean 5.m after the issue costs have been deducted
It means you need 5m of equity and the finance for the issue costs
Sign into reply to this topic.