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In this question in part b(II) we are asked to calculate the effect of the RI on the earnings per share of the company.
How do we know that Current EPS is 100 cents per share?Also when calculating Revised EPS, can I just take 5.5m/7.5m=0.73c. Would that be accepted?
And why there would be no effect on shareholder wealth?
https://www.accaglobal.com/content/dam/acca/global/PDF-students/2012/june2009quesx.pdf
Regards
MartaThe current year is 2008 – from the table in the question, the earnings are $5.5M, and there are 5.5M shares.
It would seem therefore that the earnings per share are $5.5M / 5.5M = $1 (or 100c) per share.The revised EPS is 73c (not 0.73c). I don’t really know why you are asking this because that is exactly what the examiner has done in his answer, so of course it would be accepted!!
There is never any effect on the total shareholder wealth from having a rights issue (assuming that the expansion has not begun and we are therefore looking at the theoretical ex-rights price). This is a standard effect of a rights issue – you really should watch my free lecture on this (I cannot repeat it all here).
Basically it is because although the market price per share is lower, the shareholders now own more shares – some of which (the rights) were bought cheap. The ‘loss’ on the existing shares is compensated by the ‘gain’ on the rights.
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