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Chapter 8
FIGURE 8.1 PROJECT RISK AND RETURNFIGURE 8.2 PARTICULAR REINVESTMENT RETURN REQUIREMENTS
WORKING INSIGHT 8.6 IMPACT OF RIGHTS ISSUES ON SUBSTANTIAL SHAREHOLDERS
WORKING INSIGHT 8.9A BONUS ISSUE AND A SHARE SPLIT
FIGURE 8.1 PROJECT RISK AND RETURN
Project Risk
Project Expected
Return
Project risk-return line
A
B
Company cost of capital
Company overall risk
factorProject A should be accepted
Project B should be rejected
FIGURE 8.2 PARTICULAR REINVESTMENT RETURN REQUIREMENTS
Project Risk
Project Expected
Return
Increasing return
Company cost of capital
Company overall risk
factor
Minimum return
Foregone low-risk
opportunities
WORKING INSIGHT 8.6 IMPACT OF RIGHTS ISSUES ON SUBSTANTIAL SHAREHOLDERS
TAKING UP THE RIGHTSOriginal investment is 100m @ 50p =
50.00mPaid for new shares: 25m @ 45p =
11.25m
So the shareholder now owns 125m shares, and has 11.25m less cash than previously.
125m @ 49p gives an investment value of £61.25m
Less, the cash paid of £11.25m
Net value to the shareholder is 61.25 – 11.25 = £50m
SELLING THE RIGHTSOriginal investment is 100m @ 50p =
50.00mSell each right @ [49 – 45] = 4p per shareReceive 25m @ 4p = £1m
So the shareholder now owns 100m shares valued at 49p = £49m
Plus, she has cash to the value of £1m
Total value to the shareholder is £50m
Holder of 100m shares trading at 50p has the right to buy another 25m shares @ 45p each in a one-for-four rights issue.
Theoretical post-right price is ([50p x 4] + 45p) / 5 = 49p per share
WORKING INSIGHT 8.9A BONUS ISSUE AND A SHARE SPLIT
BonusCo SplitCo
Capital structure prior to transaction
Share capital
100000 shares @ £1 par value 100 000 100 000
Retained profits 250 000 250 000
350 000 350 000
After a bonus issue of one for four shares:
Share capital
125000 shares @ £1 par value 125 000
Retained profits 225 000
350 000
After an 1.25 for one share split:
Share capital
125000 shares @ 80 p par value 100 000
Retained profits 250 000
350 000