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CTM Tutorial 2

The document contains 6 problems related to financial calculations involving rights issues, stock valuation, and decisions to buy or lease assets. It asks the reader to calculate theoretical ex-right prices, market prices, number of shares issued in rights issues, net present values of buying vs leasing options, and earnings per share before and after a stock split. Details provided include company financial statements, stock prices, required rates of return, lease payments, purchase prices, issue prices, and dividend amounts.

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crs
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292 views

CTM Tutorial 2

The document contains 6 problems related to financial calculations involving rights issues, stock valuation, and decisions to buy or lease assets. It asks the reader to calculate theoretical ex-right prices, market prices, number of shares issued in rights issues, net present values of buying vs leasing options, and earnings per share before and after a stock split. Details provided include company financial statements, stock prices, required rates of return, lease payments, purchase prices, issue prices, and dividend amounts.

Uploaded by

crs
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1. ARS Bhd. Makes 2 for 3 rights issue at an issue price of RM 2.00 .

The cum right price is


RM 4.00. You are required to calculate the theoretical ex-right price(TERP)
TERP = 16/ 5 SHARES= $3.2

2. RC Corporation bhd. has a paid up ordinary share capital of 2 million represented by 4


million shares of 50 cents each. Earnings after tax in the most recent years were RM
750,000 of which RM 250,000 was distributed as dividend. The current PE ratio of shares
is 8.
The company is planning a major investment that will cost RM 2, 025, 000 and is
expected to produce additional after tax earnings over foreseeable future of 15% of the
amount invested.
The necessary finance is to be raised by a rights issue to the existing shareholders at a
price of 25% below the current market price of the company’s shares
You are required to calculate the following
(a) The current market price of the share already in issue

Common share = 4 million shares x $0.5 =$2,000,000 market cap


Net income = $ 750000
Dividend = $ 250000
P/E ratio = 8
New Investment costs + $ 2,025,000
New right issue price is lower 25% than market price
EPS = NI / No of shares = 750000/ 4 million
=0.1875
Market price = P/E ratio x EPS
= 8 x0.1875
= $1.50

(b) The price at which the rights issue will be made

Right issue price = market price x (1-0.25)

= $1.5 x (1-0.25)

= $1.125

(c) The number of shares that will be issued

New share issues = total investment cost / price


=2,025,000/1.125
= 1,800,000 new shares issued
3. Man Engineering is considering whether to buy or lease an assets which has a 10-year
economic life with zero residual value. It can be leased for 10lease rentals for RM 12,
000 p.a. payable annually in advance. How should the company finance this asset?
Assume that the required rate of return is 10% p.a. Ignore taxation.

Buy Lease
Purchase immediate payable PMT= 12000
$ 80,000 cost N=10
No residual value I=10%
Payable annually in advance= beginning term = extra (1+i) due
PVAF= PMT(1-(1/(1+i)^n/i)(1+i)
= 12000(1-1(1/1.0)^10)/0.10)(1+0.1)
= 81108
year PMT DF DCF
0 12000 1.0000 120000
1 12000 0.9091 10909
2 12000 0.8264 9917
3 12000 0.7513 9016
4 12000 0.6830 896
5 12000 0.6209 7451
6 12000 0.5645 6774
7 12000 0.5132 6158
8 12000 0.4665 5598
9 12000 0.4241 5098

Pv=80000-(12000/(1+0.1)^10) =
0 80000
1
2
3
4
5 -12000 0.6209 -24837

Decision buy option will be selected because is cheaper than the leasing term 81108

4. Rob Bhd is considering whether to buy or lease an asset, which has 5 year economic life.
It can be purchased for RM 81, 000 payable immediately, and will have a residual value
of 40, 000 after 5 years. Alternatively, It can leased for 5 lease rentals of RM 14,000 per
annum payable annually in arrears, and the asset will be handed back to the lessor at
the end of this 5 year contract. How should the company finance the assets? Assume
that the required rate of return is 105 p.a. Ignore taxation.

Buy Lease
$ 81000 immediate payable PMT= 14000
Residual value $ 40000 N=5
I=10%

Payable annually in advance= beginning term = extra (1+i) due


PVAF= PMT(1-(1/(1+i)^n/i)(1+i)
= 14000(1-1(1/1.0)^5)/0.10)(1+0.1)
= 53071

year PMT DF DCF


0 14000 1.0000
1 14000 0.9091 12727
2 14000 0.8264 11570
3 14000 0.7513 10518
4 14000 0.6830 9562
5 14000 0.6209 8693

Pv=81000-(40000/(1+0.1)^5) =56163
0 81000
1
2
3
4
5 -40000 0.6209 -24837

Decision lease option will; be selected because it more cheaper than the buy
immediately.
5. ABC PL issued 1 for 4 rights shares on 31 May 2015 at an exercise price of $2. Market
value of its shares immediately prior to the right issue was $3.0 per share. ABC PLC had
1 million shares before the issuance of rights shares. All rights were exercised by
shareholders on 31 May 2015.

4 old share $3 12
1new share $2 2
TERP= 14
5 share 2.8

Market value = $3 x 1 million shares = $30000000


Cash proceed ( new right shares) = 1 million shares x ¼ = 250000 shares
2$ per share x 250000 shares =$500000
Old + new shares = 1 million + 250000= 1,250,000 shares
TERP =( 3000000+500000 )/ 1,250,000

6. Pharma Duece Corporation, which manufactures biotech drugs, has been experiencing a
tendons growth in the price of its common stock. The stock price increased from $ 4.50
on January 1, 2007 to $ 18.00 per share on December 31, 2007. Its current net worth
statement includes the following

Common stock (350,000 shares at $6 par) 2,100,000


Additional Paid in capital 19,050,000
Retained Earnings 1,350,000
Total Net Worth 22,500,000

(A) What changes would occur in the above statement of net worth after a 2 for 1 split?
CS( 360K X 2 @ 6/2)( 700K @$3) 2,100,000
Additional Paid in capital 19,050,000
Retained Earnings 1,350,000
Total Net Worth 22,500,000

(B) Earnings for 2007 were $ 1,575,000 what would EPS be before and after the stock
split?

EPS
BEFORE AFTER
Net Income 1575000 Net income 1575000
No of share 350000 units No of share 750000 unit
$4.5 $2.25

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