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Harpoon Co is planning to raise $14.4m through a rights issue. The chief financial officer of Harpoon has analyzed that it would take a 20% discount on the market price of share, which is currently $4.5, to make the new issue of shares fully subscribed.  The rights issue will be on a 1 for 5 basis and issue costs of 2% on the cash raised will be paid out of the cash raised. The capital structure of Harpoon Co is as follows:

EQUITY $'000 $'000
Ordinary shares            10,000    
Reserves     75,000    
          85,000
Non-current liabilities        
8% Loan notes      30,000
         115,000

 

 

Following information are relevant

  1. The net cash raised by the rights issue will be used to redeem part of the loan note issue. Each loan note has a nominal value of $100 and an ex interest market value of $105. A clause in the bond issue contract allows Harpoon Co to redeem the loan notes at a 5% premium to market price at any time prior to their redemption date.
  2. The price/earnings ratio of Harpoon Co is not expected to be affected by the redemption of the loan notes.
  3. The earnings per share of Harpoon Co is currently $0·62 per share and total earnings are $12,400,000 per year.
  4. The company pays corporation tax of 30% per year.

Requirements:

a

Evaluate the effect on the gearing and impact on the wealth of the shareholders of Harpoon Co of using the right issue proceed to redeem loan notes. 

Comment on the acceptability of the plan.

Marks: 9
b

Discuss whether Harpoon Co might achieve its optimal capital structure following the right issue

Marks: 6
c

Discuss THREE sources and characteristics of long-term debt finance which may be available to Harpoon Co.

Marks: 5

Answers submitted

Created by Ref Marking Action
Rakhi Gupta's picture
Rakhi Gupta
11/15/2020 - 10:41
a
10154
9
Rakhi Gupta's picture
Rakhi Gupta
11/15/2020 - 10:51
b
10156
6
Rakhi Gupta's picture
Rakhi Gupta
11/15/2020 - 10:57
c
10158
5
Rakhi Gupta's picture
Rakhi Gupta
11/08/2020 - 13:57
a
10076
9
Abhro Gourab Das's picture
Abhro Gourab Das
09/01/2020 - 22:29
a
9574
9
Nafeez Imtiaz Hossain's picture
Nafeez Imtiaz H...
06/14/2020 - 20:27
a
9236
9
Apurba nandy's picture
Apurba nandy
03/04/2020 - 18:01
a
9044
9
Abhro Gourab Das's picture
Abhro Gourab Das
03/03/2020 - 14:31
a
8988
9
Abhro Gourab Das's picture
Abhro Gourab Das
03/03/2020 - 14:46
b
8994
6
Abhro Gourab Das's picture
Abhro Gourab Das
03/03/2020 - 14:59
c
6880
5
Tanzeer UL Alaam's picture
Tanzeer UL Alaam
11/26/2019 - 23:14
a
7882
9
Tanzeer UL Alaam's picture
Tanzeer UL Alaam
11/26/2019 - 23:13
a
8192
9
Masum Billah's picture
Masum Billah
11/06/2019 - 21:00
a
7888
9
Masum Billah's picture
Masum Billah
11/06/2019 - 21:33
b
7896
6
Masum Billah's picture
Masum Billah
11/06/2019 - 21:44
c
7898
5
Pronob Kumer Shill's picture
Pronob Kumer Shill
11/06/2019 - 21:14
a
5834
9
Pronob Kumer Shill's picture
Pronob Kumer Shill
11/06/2019 - 21:32
b
5844
6