June 2015 – Part B – Question 4 (part a)

Good evening,

My question relates to part a of question 4 (June-15 exam) – Evaluate the effect on the wealth of the shareholders of Grenarp Co of using the net rights issue funds to
redeem the loan notes.

The first part of the calculation is calculation of theoretical ex rights price per share after right issue, which is ok and understandable.

I struggle with the second part:
Non-current liabilities 8% Loan notes $30mln
The net cash raised by the rights issue will be used to redeem part of the loan note issue. Each loan note has a nominal value of $100 and an ex interest market value of $104. A clause in the bond issue contract allows Grenarp Co to redeem the loan notes at a 5% premium to market price at any time prior to their redemption date. The price/earnings ratio of Grenarp Co is not expected to be affected by the redemption of the loan notes. The earnings per share of Grenarp Co is currently $0·42 per share and total earnings are $8,400,000 per year. The company pays corporation tax of 30% per year.

Please, may you help with the calculation of share price after redeeming loan notes?