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The directors of Loki plc, is looking to finance their business. Q plc a listed company with similar business activities to Loki has a PE ratio of 9, an equity beta of 1.2 and gearing, measured as Debt to equity of 1:2. Loki is expected to grow faster than Q plc, at least in the short run.
Flotation
If flotation is approved, then the issue share price would be set at a 15% discount to the fair value. The directors of Loki do not believe that an asset valuation is of much use here. Loki is all equity financed with 2 million ordinary shares in issue.
Dividend is $14m, expected to grow at 4% pa.
Calculate the issue price of Loki shares to the nearest cent using the dividend valuation model with a cost of equity of 14%.
The issue price is calculated normally at $0.70. but with the discount as well.
$0.70 x 0.85= 0.595 = $0.60.My trouble is the same Kaplan Kit had once indicated in a section B question that it’s illegal (in practice) to issue shares at a discount. Are they wrong and I don’t understand the whole concept of issuing price at a discount?
This is a very poor question and I would ignore it.
They can’t issue at a price lower than the nominal/par value, but the question as you have typed it does not say what the nominal value of the shares is. It could be that the nominal value is (for example) $0.50, in which case although they would be issuing at a discount on the fair value it would not be at a discount on the nominal value.
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