CTM Tutorial 2.docx

# New right issue price is lower 25 than market price

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New right issue price is lower 25% than market price EPS = NI / No of shares = 750000/ 4 million =0.1875 Market price = P/E ratio x EPS = 8 x0.1875 = \$1.50 (b) The price at which the rights issue will be made Right issue price = market price x (1-0.25) = \$1.5 x (1-0.25) = \$1.125 (c) The number of shares that will be issued New share issues = total investment cost / price =2,025,000/1.125 = 1,800,000 new shares issued 3. Man Engineering is considering whether to buy or lease an assets which has a 10-year economic life with zero residual value. It can be leased for 10lease rentals for RM 12, 000

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p.a. payable annually in advance. How should the company finance this asset? Assume that the required rate of return is 10% p.a. Ignore taxation. Buy Lease Purchase immediate payable PMT= 12000 \$ 80,000 cost N=10 No residual value I=10% Payable annually in advance= beginning term = extra (1+i) due PVAF= PMT(1-(1/(1+i)^n/i)(1+i) = 12000(1-1(1/1.0)^10)/0.10)(1+0.1) = 81108 year PMT DF DCF 0 12000 1.0000 120000 1 12000 0.9091 10909 2 12000 0.8264 9917 3 12000 0.7513 9016 4 12000 0.6830 896 5 12000 0.6209 7451 6 12000 0.5645 6774 7 12000 0.5132 6158 8 12000 0.4665 5598 9 12000 0.4241 5098 Pv=80000-(12000/(1+0.1)^10) = 0 80000 1 2 3 4 5 -12000 0.6209 -24837 Decision buy option will be selected because is cheaper than the leasing term 81108 4. Rob Bhd is considering whether to buy or lease an asset, which has 5 year economic life. It can be purchased for RM 81, 000 payable immediately, and will have a residual value of 40, 000 after 5 years. Alternatively, It can leased for 5 lease rentals of RM 14,000 per
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