TERP

Hello John

PG Co has a paid-up ordinary share capital of $4,500,000 represented by 6 million shares of 75c each. It hasn o loan capital. Earnings after tax in the most recent year were $3,600,000. The P/E ratio of the company is 15.
The company is planning to make a large new investment which will cost $10,500,000, and is considering raising the necessary finance through a rights issue at 800c.
Required
Calculate the theoretical ex-rights price, and state what factors in practice might invalidate your
calculation.

In order to raise $10,500,000 at a price of 800 cents, the company will need to issue an additional 1,312,500 ($10,500,000/$8.00) shares.
Following the investment, the total number of shares in issue will be 7,312,500 (6,000,000 +
1,312,500). At this point, the total value of the company will be:
(6m x $9) + $10,500,000 = $64,500,000
The theoretical ex-rights price will therefore be $64.5m/7.3125m = $8.82.

1. My issue is with the “At this point, the total value of the company will be: (6m x $9) + $10,500,000 = $64,500,000”
– Normally the $9 is the EPS and I want to know why this figure has being used to calculate the value of the existing share.

Thanks