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50 cent ordinary shares $4m
Retain earning $5m
Total $9mThe company has a return on ordinary shareholder funds of 10% and this level of return is expected to continue after a forthcoming 1 for 4 rights issue at 1.20 per share.
What will be the EPS ( in cents ) following the right issue?
Pls help
If you know the answer
Then why ask us?Why not say the answer is 11.4 but you can’t work out why……
The retained earnings before the rights issue are $5 million.
Profit after tax = Retained earnings * Return on ordinary shareholder funds = $5 million * 10% = $500,000.The rights issue is a 1 for 4 rights issue, they have 50 cent ordinary shares worth $4 million,
Total existing shares $4 million / $0.50 = 8 million shares.
Therefore, the number of new shares issued will be 1/4 * 8 million = 2 million shares.EPS after the rights issue $500,000 / 10 million shares = 11.4 cents per share.
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