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Hi sir, I have calculated many times but I couldnt get the answer.
STES is a listed ungeared company in Malaysia with paid capital of 150m shares. At year ending 31 Dec 2019, its market capitalisation stood at $1050m with earnings before interest and tax of $80m. The Directors predicts that its earnings to increase by 15% for the following year (2020) as a result of several government projects.
The company wishes to raise $270m (net) to finance its operations next year, and has considered the following options:
Option 1: Offer right issue at 20% discount of its market price, or
Option 2: Issue 6% loan notes at par value.
If the first option is selected, there will be $10m transaction cost from the amount raised. It is expected that price earning (P/E) ratio will remain same throughout the forthcoming year.
For the second option, it is estimated that the P/E ratio will fall by 10% by end of year 2020. There will be transaction cost amounting to $5.5m from the amount the raised.
The tax rate for company is 25%.Q1.
Determine the price of an equity share in STES in one year’s time assuming finance raised through right issue.
ANSWER : $6.04Q2.
Determine the price of an equity share in STES in one year’s time assuming finance raised the loan note.
ANSWER: $5.94Thank you.
Q1. The current share price is 1050/150 = $7 and therefore the new shares will be issued at $5.60. They need to raise a total of $280M and will therefore issue 50M new shares (so there are now 200M shares in issue).
The current PE ratio is 1050 / (75% x 80) = 17.5
Next years earnings after tax are 80 x 0.75 x 1.15 = 69M
Therefore total market value will be 17.5 x 69 = $1207.5
Therefore MV per share = 1207.5/200 = $6.04 per shareQ2. They need to raise $275.5 with interest at 6%.
Therefore the earnings next year after interest and tax will be 75% x ((80 x 1.15)- (275.5 x 6%)) = $56.6025The new PE ratio = 90% x 17.5 = 15.75
Therefore the new MV per share = 15.75 x 56.6025 / 150 = $5.94I assume that you are using a Revision Kit from one of the ACCA Approved Publishers (as you certainly should be doing) in which case I am astonished that the only had the answer and not the workings!
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