CORPORATE FINANCE (UKFF3013)

MAY 2022 TRIMESTER

TUTORIAL 5 (WEEK STARTING 21 FEB 2022)
EQUITY FINANCE (CHAPTER 4)

QUESTION 1
Discuss the reasons why a rights issue could be an attractive source of
finance for public listed companies

QUESTION 2
FAM Berhad is considering making a 1 for 5 rights issue at a 20 percent
discount to the current share price of RM5.50 per share. The funds would be
used to finance expansion of current business operations. FAM Berhad has in
issue 2.3 million ordinary shares and profit after tax in the last year was RM1.38
million. FAM Berhad expects an after-tax return of 15 percent on the new funds
raised. A non-executive director has advised FAM Berhad that using the rights
issue to fund expansion of business activities will result in a fall in earnings per
share, which will not be welcomed by the ordinary shareholders of the
company.
(a) Calculate:
1. Rights issue price
2. The theoretical ex-rights price per share
3. The value of the rights
4. Number of new shares that will be issued
5. Finance raised by the rights issue
6. After-tax returns on new funds
7. Revised earnings
8. Revised number of shares
9. Revised earnings per share
10. Current earnings per share
11. Current price/earnings ratio
12. New share price (assuming no change in PER)
(b) Explain why the return required by ordinary shareholders is different from the
return required by bondholders.

ANSWER

(1) Rights issue price

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 CORPORATE FINANCE (UKFF3013)
MAY 2022 TRIMESTER
TUTORIAL 5 (WEEK STARTING 21 FEB 2022)
EQUITY FINANCE (CHAPTER 4)

(2) Theoretical ex right price

(benchmark)

(3) Value of rights

(4) New shares issued

(5) Finance raised

(6) After-tax return on new funds

(7) Revised earnings

(8) Revised number of shares

(1mark)

(9) Revised earnings per share

(10) Current earnings per share

(11) Current price/earnings ratio

(12) Assuming no change in PER,

NEW share price

(b)

QUESTION 3
SF Berhad wishes to increase its production capacity by purchasing additional
plant and equipment at a cost of RM3.8 million. The abridged profit and loss
account for the year ended 30th November 2016 is as follows:

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 CORPORATE FINANCE (UKFF3013)
MAY 2022 TRIMESTER
TUTORIAL 5 (WEEK STARTING 21 FEB 2022)
EQUITY FINANCE (CHAPTER 4)

RM million

Sales turnover 140.6

Profit before interest and taxation 8.4

Interest 6.8

Profit before tax 1.6

Taxation 0.4

Profit after taxation 1.2

Earnings per share 15sen

In order to finance the purchase of the new plant and equipment, the directors
of the company have decided to make a rights issue equal to the cost of the
equipment. The shares are currently quoted on the stock exchange at 270sen
per share and the new shares will be offered to shareholders at 190sen per
share.
Required:
Calculate
(i) The theoretical ex-rights price per share
(ii) The value of the rights on each existing share.
(iii) Assuming the increase in production capacity will lead to an increase in
profit after tax of RM600,000 per annum and the price-earnings ratio (P/E
ratio) of the company will remain unchanged after the rights issue, calculate
the market value per share after the rights issue.

ANSWER

Number of shares in issue

Value of existing shares

Cash raised from new

shares

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 CORPORATE FINANCE (UKFF3013)
MAY 2022 TRIMESTER
TUTORIAL 5 (WEEK STARTING 21 FEB 2022)
EQUITY FINANCE (CHAPTER 4)

Total value after rights

Number of shares issued

through rights issue

Form of rights

Total number of shares

after rights issue

Current value of 4 existing

shares

Rights issue of 1 share

Theoretical value of 5
shares

Theoretical ex-rights
price

Current market value of

existing share

Theoretical ex-rights price

Rights issue price

Value of a right

Existing P/E ratio

Revised profit after tax

Revised total market value

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 CORPORATE FINANCE (UKFF3013)
MAY 2022 TRIMESTER
TUTORIAL 5 (WEEK STARTING 21 FEB 2022)
EQUITY FINANCE (CHAPTER 4)

Therefore, NEW market

value per share

QUESTION 4
C Berhad has 6,000,000 ordinary shares in issue and has been making regular
annual profits after tax of RM3,000,000 for some years. The current share price
is RM5.00. A proposal has been made to issue 2,000,000 new shares in a
rights issue at an issue price of RM4.50 per share. The funds would be used
to redeem RM9,000,000 of 12% debenture stock. The rate of corporation tax
is 33%. Assume that C Berhad’s P/E ratio remains unchanged by the rights
issue. Assume that the market is semi-strong efficient and that details of the
way in which the funds raised will be used are included in the announcement
of the rights issue?
What would be the predicted effect of the rights issue on the share price?
Would you recommend that the issue take place?

ANSWER

RM

Current annual earnings

Increase in earnings after rights issue

Interest saved

Less tax on extra profits (33%)

Anticipated annual earnings

Number of shares

EPS

Current P/E ratio

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 CORPORATE FINANCE (UKFF3013)
MAY 2022 TRIMESTER
TUTORIAL 5 (WEEK STARTING 21 FEB 2022)
EQUITY FINANCE (CHAPTER 4)

Anticipated share price (If P/E

ratio stays the same

Current value of three shares

Rights issue price of one share

Theoretical value of four shares

ex rights

Theoretical ex rights price

Comment:

QUESTION 5
S Berhad is a small company which manufactures and distributes gymnastic
equipment, has been trading since 2X09. There are only few directors and they
owned all the shares. These directors are employed full time to manage the
business. It made sales of 100,000 units at an average wholesale price of RM10
per unit during its last financial year ending 30 April 2X13. In 2X13-2X14, the
management has planned to introduce a new brand of equipment which will be
sold at a lower unit price to more price-sensitive market segments. The
introduction of the new brand is expected to raise total sales by 15%. To support
greater sales activity, it is expected that additional financing, both long term
capital and working capital, will be required. S Berhad expects to make capital
expenditures of RM1,060,000 in 2X13-2X14, partly to replace worn-out
equipment and purchase new equipment to support the expected sales
expansion. The directors proposed that 1 for 4 rights issue should be made at
a 20% discount to the current share price of RM2·30 per share in order to
reduce gearing and the financial risk of the company. You may assume that all
current assets and current liabilities will vary directly in line with sales. S
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 CORPORATE FINANCE (UKFF3013)
MAY 2022 TRIMESTER
TUTORIAL 5 (WEEK STARTING 21 FEB 2022)
EQUITY FINANCE (CHAPTER 4)

Berhad’s statement of financial position (balance sheet) for the financial year
ending 30 April 2X13 shows the following:

RM000 RM000

Non-current assets 1200

Current assets;

Inventories 160

Receivables 230

Cash 60 450

Total assets 1650

Equity and liabilities

Ordinary shares (50sen par value) 600

Retained profits 220

Total equity 820

Long term debt at 12% 600

Current liabilities

Trade payables 230

1650

Required:
a. Calculate the theoretical ex rights price per share, value of rights and the
amount of finance that would be raised from rights issue.
b. An investor owns 2,000 shares in S Berhad. The investor takes up his
rights. Determine and discuss the effect on his wealth.

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 CORPORATE FINANCE (UKFF3013)
MAY 2022 TRIMESTER
TUTORIAL 5 (WEEK STARTING 21 FEB 2022)
EQUITY FINANCE (CHAPTER 4)

SUGGESTED ANSWER
(a)

Current share price

Rights issue price

TERP

Value of rights

Amount of finance raised:

Number of shares
issued

Cash raised

(b)

Investor entitle to buy

Total investment in
rights issue

Current value of 2000

shares

Additional investment in
rights issue

Total wealth before

rights issue

After rights issue, total

share holding

Theoretical value of
2500 shares

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