BUSF_A01.qxd

Problems

10.6 Vocalise plc has recently assessed a new capital investment project that will expand

its activities. This project has an estimated expected net present value of £4 million.

This will require finance of £15 million. At the same time, the business would like to

buy and cancel the entire £10 million of 15 per cent loan notes, which are due to be

redeemed at par in four years’ time. It is estimated that the business will incur deal-

ing costs of £0.3 million in buying the loan notes. There are plans to raise most of the

necessary finance for the investment project and for buying the loan notes through a

one-for-one rights issue of equity at an issue price of £0.50 per share. The remaining

finance will come from the business’s existing cash resources. The issue will give rise

to administrative costs of £0.4 million.

None of these plans has been announced to the ‘market’, which is believed to be

semi-strong efficient.

Vocalise plc’s capital structure is as follows:

£m

Ordinary shares of £0.25 each 10

Reserves 14

24

15% loan notes 10

10% term loan 15

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The current and likely future rate of interest for loans to businesses like Vocalise plc

is 10 per cent p.a. The business’s ordinary shares are currently quoted at £0.85 each.

(a) Estimate the theoretical share price following the announcement of the plans and

the issue of the new shares, assuming that the only influences on the price are

these plans. (Ignore taxation.)

(b) Why might the theoretical price differ from the actual one?

There are sets of multiple-choice questionsand missing-word questions

available on the website. These specifically cover the material contained in this

chapter. These can be attempted and graded (with feedback) online.

There are also five additional problems, with solutions, that relate to the material

covered in this chapter.

Go towww.pearsoned.co.uk/atrillmclaneyand follow the links.

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