FIN4801 Assignment 2

FIN4801 Assignment 2 FIN4801 Assignment 2 2018 Question 1 (20 Marks) Question 1.1 (4 Marks) The correct option was C. Calculation: The company wished to raise R8 billion. One share is worth R1000, but will be under-priced by 20%; so, the company will only receive R800 per share. Therefore, to get R8 billion in financing, it will need to issue R8 billion ÷ R800 = 10 million shares that must be issued. Question 1.2 (4 Marks) The correct option was: B. Preference shares could be used to raise funds without breaking the covenants with debt holders (especially true for non-redeemable preference shares that have discretionary payments that would in most instances be classified as equity). Another way of arriving at the answer is to argue that all the other options would break the covenants. Question 1.3 (4 Marks) The correct option was: B. Currently, the value of equity is: 20 000 x R150 = R3 000 000 (1) The value of new equity is R2 000 000 (given). Total value after the issue: R3 000 000 (1) + R 2000 000 = R5 000 000. Shares issued in rights offer: R2 000 000 ÷ R100 = 20 000 shares (2) Total shares outstanding: 20 000 (given) + 20 000 (2) = 40 000 Theoretical value: R5 000 000 ÷ 40 000 = R125. Question 1.4 (4 Marks) The correct option was: C. Refer to page 13-28 in your prescribed book for a discussion on long-term debt and bond financing. Question 1.5 (4 Marks) The correct option was: C. Refer to page 13-33 in your prescribed book for a discussion on inflation-linked bonds.