1. What is the right issue of shares? Will it maximize the shareholder's wealth?

A rights issue is an invitation to existing shareholders to purchase additional new shares in

the company. With the rights, the shareholder can purchase new shares at a discount to the
market price on a stated future date.
This kind of issues by the company to shareholder giving the chance to increase their
exposure to the stock at a discounted price. This will encourage shareholders to purchase
more shares to get more profits at a future time. Thus, the shareholder can purchase the
share at lower price and can be trade those shares at higher price at later time.
2. How does the business deal with the goal of shareholder wealth maximization together
with other goals (financial and non-financial) of the business?
The goal of shareholder wealth maximization is about how financial decisions should be
made in an organization. But, not all management decisions need to be made by this. Using
the index of managerial performance, we can measure the managerial success in achieving
the shareholder wealth maximization objective. They should try and work to maximize the
sales or market share.
And also, the company has to be survived to attract shareholder. It has been seen that all
those firms which don’t give attention to stockholder interests and are more indulged in
promoter profit maximization perform poorly in long term. There is always a divergence in
shareholder wealth maximization goal and the other objectives which are undertaken by
management.

3. Explain the term cost of capital and how it relates to project appraisal with an
example?
Cost of capital refers to the amount of return a company should have on a specific
investment after cost of capital is accounted for.
The project’s cost of capital is the minimum required rate of return on funds committed to
the project, which depends on the riskiness of its cashflow. Cost of capital is the opportunity
cost of funds available to a company for investment in different projects. The most common
measure of cost of capital is the weighted average cost of capital.
For Example, the investors must compare the return available on the project with the cost of
capital and accept the project only where the return is higher than the cost of capital. If they
invest in projects with return lower than the cost of capital, they are effectively destroying
their shareholders wealth.

4. Critically explain the importance of valuation concepts to a business.

Investment Decisions by the Company
It is widely used for making investment decisions in companies by evaluating their projects
and various options.
Evaluation of Projects with the Same Risk
 When the new projects have a similar risk level or the risk level is the same as the existing
projects of the company; it becomes an appropriate and preferred benchmark rate to decide
the acceptance or rejection of these new Projects.
Evaluation of Projects with Different Risk
The appropriate measure to evaluate a project is WACC. However, WACC has two
underlying assumptions. These assumptions are that the projects under discussions have
‘same risk’ and also the ‘same capital structure’.

5. Explain followings:
a. The importance of the capital market for the development of the Sri Lankan economy.

b. Capital market efficiency.