Swale Ltd. wants to raise Shs. 15,000,000 in additional funds through a rights offering. The following statements were prepared just before the planned rights offerings:
i) The company had a price-earnings ratio of 7.5 at the time of the rights offering. Its dividend payout ratio is 40%.
ii) The proposed rights offering subscription price per share is Sh.15.
iii) No change is expected in the return on total assets or dividend payout ratio after the rights offering.
a) How many rights are required to buy one new share?
b) Calculate the return on total assets.
c) Calculate the following immediately before the rights issue:
– Dividend per share;
– Market price per share.
d) Calculate the dividend per share and market price per share one year after the rights of offering and state whether you would recommend the rights offering. (Give reasons)
e) Prepare the company‟s balance sheet immediately after the rights offering under (c)
Despite the decrease in MPS, EPS and DPS, shareholders have more shares hence increased wealth and earnings.