【正确答案】Rights issue price = 3·50 x 0·8 = $2·80 per share Grenarp Co currently has 20 million shares in issue ($10m/0·5) The number of new shares issued = 20m/5 = 4 million shares Cash raised by the rights issue before issue costs = 4m x 2·80 = $11,200,000 Net cash raised by the rights issue after issue costs = 11,200,000 – 280,000 = $10,920,000 Revised number of shares = 20m + 4m = 24 million shares Market value of Grenarp Co before the rights issue = 20,000,000 x 3·50 = $70,000,000 Market value of Grenarp Co after the rights issue = 70,000,000 + 10,920,000 = $80,920,000 Theoretical ex rights price per share = 80,920,000/24,000,000 = $3·37 per share (Alternatively, issue costs are $0·07 per share (280,000/4m) and this is a 1 for 5 rights issue, so the theoretical ex rights price = (5 x 3·50 + (2·80 – 0·07))/6 = 20·23/6 = $3·37 per share) Redemption price of loan notes = 104 x 1·05 = $109·20 per loan note Nominal value of loan notes redeemed = 10,920,000/(109·20/100) = $10,000,000 Before-tax interest saving = 10,000,000 x 0·08 = $800,000 per year After-tax interest saving = 800,000 x (1 – 0·3) = $560,000 per year Earnings after redeeming loan notes = 8,400,000 + 560,000 = $8,960,000 per year Revised earnings per share = 100 x (8,960,000/24,000,000) = $0·373 per share Price/earnings ratio of Grenarp Co before the rights issue = 3·50/0·42 = 8·33 times This price/earnings ratio is not expected to be affected by the redemption of loan notes Share price of Grenarp Co after redeeming loan notes = 8·33 x 0·373 = $3·11 per share The wealth of shareholders of Grenarp Co has decreased as they have experienced a capital loss of $0·26 per share ($3·37 –$3·11) compared to the theoretical ex rights price per share.

【正确答案】The capital structure is considered to be optimal when the weighted average cost of capital (WACC) is at a minimum and themarket value of a company is at a maximum. The goal of maximising shareholder wealth might be achieved if the capitalstructure is optimal. The question of whether Grenarp Co might achieve its optimal capital structure following the rights issue can be discussedfrom a theoretical perspective by looking at the traditional view of capital structure, the views of Miller and Modigliani oncapital structure, and other views such as the market imperfections approach. It is assumed that a company pays out all ofits earnings as dividends, and that these earnings and the business risk of the company are constant. It is further assumedthat companies can change their capital structure by replacing equity with debt, and vice versa, so that the amount of financeinvested remains constant, irrespective of capital structure. The term ‘gearing up’ therefore refers to replacing equity with debtin the context of theoretical discussions of capital structure. Traditional view The traditional view of capital structure, which ignores taxation, held that an optimal capital structure did exist. It reached thisconclusion by assuming that shareholders of a company financed entirely by equity would not be very concerned about thecompany gearing up to a small extent. As expensive equity was replaced by cheaper debt, therefore, the WACC would initiallydecrease. As the company continued to gear up, shareholders would demand an increasing return as financial risk continuedto increase, and the WACC would reach a minimum and start to increase. At higher levels of gearing still, the cost of debtwould start to increase, for example, because of bankruptcy risk, further increasing the WACC. Views of Miller and Modigliani Miller and Modigliani assumed a perfect capital market, where bankruptcy risk does not exist and the cost of debt is constant.In a perfect capital market, there is a linear relationship between the cost of equity and financial risk, as measured by gearing.Ignoring taxation, the increase in the cost of equity as gearing increases exactly offsets the decrease in the WACC caused bythe replacement of expensive equity by cheaper debt, so that the WACC is constant. The value of a company is therefore notaffected by its capital structure. When Miller and Modigliani included the effect of corporate taxation, so that the after-tax cost of debt was used instead ofthe before-tax cost of debt, the decrease in the WACC caused by the replacement of expensive equity by cheaper debt wasgreater than the increase in the cost of equity, so that the WACC decreased as a company geared up. The implication in termsof optimal capital structure was that a company should gear up as much as possible in order to decrease its WACC as muchas it could. Market imperfections view When other market imperfections are considered in addition to the existence of corporate taxation, the view of Miller andModigliani that a company should gear up as much as possible is no longer true. These other market imperfections relate tohigh levels of gearing, bankruptcy risk and the costs of financial distress, and they cause the cost of debt and the cost ofequity to increase, so that the WACC increases at high levels of gearing. Grenarp Co The question of whether Grenarp Co might achieve its optimal capital structure following the rights issue can also bediscussed from a practical perspective, by considering if increasing the gearing of the company would decrease its WACC.This would happen if the marginal cost of capital of the company were less than its WACC. Unfortunately, there is noinformation provided on the marginal cost of capital of Grenarp Co, although its gearing is not high. Before the rights issue,the debt/equity ratio of Grenarp Co was 35% on a book value basis and 45% on a market value basis, while after theredemption of loan notes the debt/equity ratio would fall to 21% on a book value basis and 28% on a market value basis.