Business Model

Business Model

TABLE OF CONTENTS
SECTION A.....................................................................................................................................3
Q1................................................................................................................................................3
Q2................................................................................................................................................4
Q3................................................................................................................................................5
Q4................................................................................................................................................5
Q5................................................................................................................................................6
Q6................................................................................................................................................7
SECTION B.....................................................................................................................................8
Q3................................................................................................................................................8
SECTION C.....................................................................................................................................9
Q4................................................................................................................................................9
REFERENCES..............................................................................................................................11

SECTION A
Q1.
A
Particulars Figures
Current number of shares 250,000,000
Number of additional shares
issued 90,000,000
Current market price per share 1.5
Right issue price (@ 40%
discount of current market price) 0.9
Theoretical Ex-rights price 1.34
Value of right = Number of right share / Total holding * (market value – issue price)
= 90000000/ 340,000,000 * (1.5 – 0.9)
= 0.15
B
Particulars Figures
Current number of shares 250000000
Number of additional shares
issued 90000000
Current market price per share 1.20
Right issue price (@ 40%
discount of current market price) 0.72
Theoretical Ex-rights price 1.07
Value of right = Number of right share / Total holding * (market value – issue price)
= 90000000/ 340,000,000 * (1.20 – 0.72)
= 0.12
C
With the help of the above calculation it is clear that the investor who is having 500 shares
can have two option that is either well off from investing within the issue or must sell the issue.
With regards to the calculation above, it is recommended to the company that they must not sell
the rights rather they must invest in the issue. The reason underlying this fact is that it will
provide an additional benefit to the investor as their number of shares will be increased and its
value as well.

Q2.
A
Calculation of Earnings per share
EPS assuming firstly that the company continues to be all equity financed:
= Earnings available for equity shareholders/ Shareholders outstanding
= £200 (1 – 0.30)/ 700 = 140/ 700
0.2 per shares.
EPS assuming buyback of shares and issuance of debts:
= Earnings available for equity shareholders/ Shareholders outstanding
= £180 (1 – 0.30)/ 700 – 200
= 126/ 500
= 0.252 per share
Earnings before interest and tax – interest
200 – (250* 8/100)
= 200 – 20 = £180
B
The level of earnings at which the EPS in both the option of financing is £252 million.
Verification:
Earnings = 252 m
Less Tax @30% = (75.6m)
Earnings after tax = 252 – 75.6 = 176.4m
Earnings per share = 176.4/ 700 = 0.252
C
Calculation of Equity cost of capital assuming it un-geared
Cost of equity = Earnings per share/ current market price of share
= £0.2/£1.25 = £0.16
D
Calculation of value of company if it restructures its financing
Value of company = Value of equity + value of debt
= 500* 1.25 + 250
= 625 + 250 = £875 million