Advanced financial management revision question and answer

Advanced Financial Management Block Revision Mock Exams

Kianjoya company Ltd has 2 million ordinary shares outstanding at the current market price of Sh.60 per share. The company requires Sh.8 million to finance a proposed expansion project. The board of directors has decided to issue a 2 for 25 rights at a subscription price of Sh.50 per share. The expansion project is expected to increase the firm‟s annual cash flows Sh.1,660,000. Information on this project will bereleased to the market together with the announcement of the rights issue. The company paid a dividend of sh.6 per share last year. This dividend together with the company‟s earnings is expected to grow at 6% annually.

Required:
(i) Compute the price of the shares after the announcement of the rights issue but before they start selling ex-rights.

(ii) Compute the theoretical value of rights and the theoretical ex-rights price of the shares.
ANSWER

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