Disco Ltd is financed by 31 million shares of equity with a market capitalisation of...
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Disco Ltd is financed by 31 million shares of equity with a market capitalisation of 74.4 million, and debt with a face value and market value of 30 million. The interest rate on the debt is 7.5% and debt interest is tax deductible. The firms most recent earnings before interest and tax is 16.25 million. The corporate tax rate is 21%. There are no market imperfections apart from corporate tax.
- What are Discos current earnings per share, share price, and cost of equity (return on equity)?
Suppose the firm decides to change its capital structure by holding a rights issue to raise enough cash to reduce the debt to 15 million. The rights price will be at a 20% discount off the current share price.
- How many new shares must be issued in the rights issue? What will be the new earnings per share?
- What is Discos share price following the rights issue?
- What is Discos cost of equity following the rights issue? Has it changed? Why/why not?
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