Financial management revision question & answer

CPA-Financial-Management-Section-3 Revision kit

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:


Additional information:
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.

Required:
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‚Äüs balance sheet immediately after the rights offering under (c)
above.
ANSWER


The rights issue was worth it since it led to increased market value or wealth of the shareholders, total earnings and total dividends.

Despite the decrease in MPS, EPS and DPS, shareholders have more shares hence increased wealth and earnings.

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