Question 2 – Long term finance: Equity finance
(a) Lexbel plc generates earnings after tax (PAT) of 20 per cent on shareholders’ funds.Its
current capital structure is as follows:
Ordinary shares of50p each 300,000
The board of Lexbel plc wishes to raise £180,000 from a right issue in order to expand
existing operations. Its return on shareholders’ funds will be unchanged. The current exdividend market price of Lexbel plc is £1.90. Three different rights issue prices have been
suggested by the finance director: £1.80, £1.60 and£1.40.
(b) Determine the:
i. number of shares to be issued.
ii. theoretical ex-rightsprice.
iii. expected earnings per share and
iv. form of the issue for each rights issue price, and
v. Present your results in a tabular form and critically evaluate the best option among the
three right issues.
(c) It has become common for companies to offer their shareholders a choice between a cash
dividend and an equivalent scrip dividend. Critically discuss the advantages of scrip
dividends from the point of view of the company and the shareholders, ensuring the response
draws upon relevant academic research within this highly topical area of financial
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