(a) Lexbel PLCgenerates earnings after tax (PAT) of 20 per cent on shareholders’ funds. Its currentcapital structure is as follows:£Ordinary shares of 25p each300,000Reserves 400,000700,000The board of Lexbel PLCwishes to raise £180,000 from a right issue to expand existing operations.
Its return on shareholders’ funds will be unchanged. The current ex-dividend market price of Lexbel PLCis £1.90. Three different rights issue prices have been suggested by the finance director:
£1.80, £1.60,and £1.40.
(a) Determine the :
i.number of shares to be issued,ii.theoretical ex-rights price,iii. expected earnings per share andiv. form of the issue for each rights issue price, andv.
Present your results in a tabular form and critically evaluate the best option among the three right issues(20 marks)
(b) It has become common for companies to offer their shareholders a choice between a cash dividendand an equivalent scrip dividend. Critically discuss the advantages of scrip dividends from the point of view of the companyand the shareholders,ensuring the response draws upon relevant academic research within this highly topical area of financial management.
