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SIR
I have answered the question this way, revised share 24mProfit before tax (8400/70*100)=12000
Decrease in interest(11200/31200*2.4)=864
Taxable profit (12000+864)=12864
Profit after tax(12864*.7)=9005so revised EPS=9005000/24m= .38
after seeing your answer feeling cry . i dont know what have i done!! sir will i get a few number?
Although I disagree with the amount of the decrease in the interest, your approach is fine otherwise – how you set out the workings does not matter.
You will certainly get some marks.
okay sir!!
But my question is EPS reduced because shares increased but profit has not increased much so , cant we say that shareholders wealth decreased?First, profit available for shareholders will increase because there is less interest payable.
Second, although there are more shares in issue, the shareholders will have more shares than before.
(Remember, that a rights issue on its own has no affect on the overall shareholders wealth. What will affect it is what the company does with the money raised – in this case they are using it to reduce the interest that is payable and hence increase the profits.)
Dear Mr. John Moffat
I have also tried to solve in a different way. Before rights issue no. of shares were 20 million…. which increased to 24million. (1 for 5 rights issue.)P/E ratio before rights issue were 8.33 (current market value of $3.5 per share / EPS of $0.42 per share). After rights issue I asuumed the total earnings will remain unchanged i.e.$ 8400,000.(as this is the current earnings and we are determining the immediate effect). So the revised EPS is $0.35 per share ($8400,000/24 million). As the market price of the share is EPS * P/E ratio and the P/E ratio is unchanged so revised market price is $2.96 per share(0.35 * 8.33). Comparing this with the theoretical ex- rights price of $3.38 per share ((5 * 3.5 + 1 * 2.8)/6) this is a net capital loss of $0.42 per share (3.38 – 2.96) .Dear Sir…..
what do you think about my answer 🙂Mosaddegue, i think you messed the thing a little bit, earnings are not the same, you should have found the earnings after saving in interest
Hi John
Thank you for uploading your suggested answers.
Regarding question 4, I deducted the 280k issue costs from the $11.2m had $1,092,000 to buy back the loan notes, will I still get some marks?
Many thanks
Yes, certainly. I am not the marker but I would be surprised if it lost you more than one mark (assuming that you were doing everything else correctly).
Mr. John Moffat
Would you kindly give any opinoin about my answer? I am eagerly seeking for your comments….. sir
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