Financial Management Case Scenario Term Paper

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Financial Management (case scenario)

The theoretical ex-rights price may be calculating the following way. We have the following known variables:

Fair value of all shares = 12,000,000 * 135 = 1,620,000,000

Total amount received from exercise of rights = 1,500,000*108 = 162,000,000

Number of shares prior to exercise = 12,000,000

Number of shares issued in the exercise = 1,500,000

Then, the theoretical ex-rights price is 1,620,000,000 + 162,000,000)/(12,000,000 + 1,500,000) = 132 cents

Hence, the value of a right is 3 cents..

The Alpha Leisure is issuing at a discount to make the shares more interesting for the investors. However, if we consider an investor from outside the company (one who doesn't have ordinary shares in the company until now), then he will purchase actions at 108 cents, plus the 24 cents per action, representing the 8 rights necessary to buy an action. In this way, the price will arrive at the ex-rights price, which would have been 132.

WACC can be calculated by multiplying the cost of each capital component by its weighting and then summing. As in our case, we have one debt element (debentures stock) and two equity elements (preference shares and common shares). Let's address each in part:

Total market value = $26,000,000

Total value of debt = 8.0 mil, that is 30.7%

Total value of preference shares = 8.

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0 mil =6.4%

Total cost of common shares = 57.8%

Then, WACC = a*kD + b* kP + c*kC, where a, b, c = weight in total value (as calculated above) and kD, kP and kC the cost of each source of capital. In order to evaluate WACC, we have to calculate in part kD, kP and kC.

A kD = D* (1-T), where T = corporation tax = 35% and D = 11%. This formula accounts for the fact that this expense is deductible. The final value for kD is kD = 7% kP = Dp/Pp, where Dp is the dividend paid for preference shares and Pp- price of preference shares.

A kP = 0.01 = 1% kC = D/P+g, where D- dividend paid, p- price per common share and g - rate of growth estimated over period of time kC = 18/135 + 0.08 = 0.21 = 21%

Then, the WACC can be calculated as WACC = 0.307*0.07 + 0.01*0.064 + 0.578*0.21 = 0.14 = 14% d) The Capital Asset Pricing Model could be used to evaluate the cost of the equity capital following the formula used in the model. In the formula, there are three unknown.....

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