(c) Calculate the theoretical ex rights price per share and the net funds to be raised by

(c) Calculate the theoretical ex rights price per share and the net funds to be raised by the rights issue, and

determine and discuss the likely effect of the proposed expansion on:

(i) the current share price of Merton plc;

(ii) the gearing of the company.

Assume that the price–earnings ratio of Merton plc remains unchanged at 12 times. (11 marks)

(c) Rights issue price = 2·45 x 0·8 = ￡1·96Theoretical ex rights price = ((2 x 2·45) + (1 x 1·96))/3 = 6·86/3 = ￡2·29New shares issued = 20m x 1/2 = 10 millionFunds raised = 1·96 x 10m = ￡19·6 millionAfter issue costs of ￡300,000 funds raised will be ￡19·