A listed company plans to raise $350 million to finance a major expansion programme.
The cash flow projections for the programme are subject to considerable variability.
Brief details of the programme have been public knowledge for a few weeks.
The directors are considering two financing options, either a rights issue at a 20% discount to current share price or a long term bond.
The following data is relevant:
The company’s share price has fallen by 5% over the past 3 months compared with a fall in the market of 3% over the same period.
The directors favour the bond option.
However, the Chief Accountant has provided arguments for a rights issue.
Which TWO of the following arguments in favour of a right issue are correct?
A . The issue of bonds might limit the availability of debt finance in the future.
B . The recent fall in the share price makes a rights issue more attractive to the company.
C . The rights issue will lead to less pressure on the operating cash flows of the programme.
D . The WACC will decrease assuming Modigliani and Miller’s Theory of Capital Structure without taxes applies.
E . The administrative costs of a rights issue will be lower.
Answer: A,C