Maximise the shareholders wealth

Questions for Seminar 2

 

1.         The main objective of corporate finance is to maximise the shareholders wealth, discuss how this objective is consistent with other public limited company’s objectives?

 

  1. Why can’t a Company be funded entirely by debt capital?

 

3.         Gander Plc has the following capital structure:

 

Ordinary Shares                                           £500,000

9% Cumulative Preference Shares                      £200,000

6% Bonds                                                      £100,000

 

EBIT (Earnings Before Interest and Tax) for the past five years has been:

 

2010               £30,000

2009               £40,000

2008               £20,000

2007               £50,000

2006               £25,000

 

It is company policy to distribute half of the available income after paying the debt interest and the preference dividends to the ordinary shareholders as dividends.  The retained amounts are reinvested in the company in the following year and not available for the payment of dividends.

 

Required:

 

Calculate and comment on the amounts paid to each class of investor for each year.  You may ignore tax.

 

  1. A Company is raising £500,000 by issuing Convertible bonds.  Explain the advantages off this form of finance to both the company and the investor.  If the conversion rate is three ordinary shares for each £5 worth of bonds would you expect the investor to convert the bond if the market price of the share on the conversion date is 186p?

 

  1. Company C wishes to issue 750,000 new shares by a tender offer.  By the closing date the issuing house had received the following bids:

 

No. of shares Bid price per share
60,500 234p
281,350 218p
408,150 201p
503,000 190p

 

Calculate and justify the price that the shares would be issued at and the amount the company would receive (you may ignore any transaction costs).

 

  1. Company D has offered their existing shareholders a 3 for 5 rights issue.  If the current market price of the shares is 375p each and the rights price is 300p calculate the theoretical ex-rights share price and the value of the right.

 

 

 

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