1. (8 marks)
Jundel Inc. plans $400,000 in capital outlays for next year.
The firm has a .25 D/E
ratio, and uses a residual dividend policy.
Earnings per share for the upcoming period are expected
to be $3.50.
There are 200,000 shares.
What is the firm’s expected dividend per share for the
Step 1 - Calculate the amount of new equity (i.e., retained earnings)
needed for next year.
Total Capital = D + RE = $400,000
D = .25 RE
+ RE = $400,000
RE = $400,000/1.25 = $320,000
Step 2 - Calculate the amount of the total dividend
Total Dividend = Total Earnings - Total Retained Earnings
Total Dividend = (200,000*$3.40) - $320,000 = $360,000
Step 3 - Calculate the Dividend per share
Dividend per share = Total Dividend / Number of shares = $360,000 / 200,000 = $1.80 per share
2. (12 marks)
Jaltech Corp. needs to raise $4,000,000 for a new plant in Jamaica.
The firm currently
million shares outstanding and the share price is $12.60 per share.
The firm is thinking of
doing a rights offering.
The subscription price will be $8 per share.
Each shareholder will get one
right for each existing share.
a) (3 marks)
How many rights will be needed to purchase one new share?
Number of new shares = $4M/$8 = 500,000
Number of rights/share = (# of old shares )/(# of new shares) = 5M/500,000 =
b) (3 marks)
What will be the ex-rights price of the shares?
Price = (Equity Value)/(# of shares) = ((5M*$12.60) + $4M)/(5M+500,000) =
c) (3 marks)
There are mailing costs associated with the rights offering.
First, the firm has to mail
all shareholders an information circular with a sign-up form, and then, if the shareholder sends back a
completed sign-up form with the necessary funds, the firm has to send each shareholder a letter
confirming the purchase of the new shares.
The average number of shares held by each shareholder
is 100 shares.
Each mailing costs the firm $1.50 and it is expected that 90% of the shareholders will