At a recent Board meeting, the Board Chair of Mempeasem Ltd suggested the need to restructure the capital of their company. The Chair proposed shares repurchase as the option to consider but majority of the Board members were hearing this term for the first time. As the Finance Manager, you have been directed to help the Board members to understand this option for decision making.
Required:
i) Explain the term share repurchase to a non-finance person.                                                                                          (1 mark)

ii) Identify FOUR (4) situations under which share repurchase will be useful for Mempeasem Ltd.                               (5 marks)

The Board of Directors of Continental Bank Ghana Ltd (CBGL) decided through a Board resolution to raise additional capital through rights issue to meet the new capital requirement by Bank of Ghana. CBGL plans to issue 1 new share for every 3 shares held by existing shareholders at 10% discount to its existing market price. CBGL currently has 6 million shares in issue at a book value of 2 cedis per share. CBGL maintains a dividend payout ratio of 50% and earnings per share currently is 1.6 cedis. Dividend growth is 5% per annum and this is expected into the foreseeable future. CBGL’s cost of equity is 15%. The issue cost is 600,000 cedis.
Required:
Calculate:
i) The market price per share                                                                                                         (2 marks)

ii) The capitalization of CBGL.                                                                                                     (2 marks)

iii) The rights issue price                                                                                                                (2 marks)

iv) The theoretical ex-right price                                                                                                    (2 marks)

v) The market capitalization after the rights issue                                                                          (2 marks)

b) The Moorgate Company has issued 100,000 GH¢1 par equity shares which are at present selling for GH¢3.00 per share. It has also issued 50,000 warrants, each entitling the holder to buy one equity share. The warrants are protected against dilution. The company has plans to issue rights to purchase one new equity share at a price of GH¢2 per share for every four shares.

Required:
i) Calculate the theoretical ex rights price of Moorgate’s equity shares.                                                                          (4 marks)

ii) Calculate the theoretical value of a Moorgate right, before the shares sell ex rights.                                                  (3 marks)

c) The chairman of the company receives a phone call from an angry shareholder who owns 1,000 shares. The shareholder argues that he will suffer a loss in his personal wealth due to this rights issue, because the new shares are being offered at a price lower than the current market value.
The chairman assures him that his wealth will not be reduced because of the rights issue, as long as the shareholder takes appropriate action.
Required:
Prepare a statement showing the effects of the right issue on this particular shareholder’s wealth, assuming:
i) He sells all the rights.                                                                                                                                  (3 marks)

ii) He exercises one half of the rights and sells the other.                                                                              (3 marks)

iii) He does nothing.                                                                                                                                       (2 marks)

A company with 20 million shares in issue announces a 2 for 5 rights issue at a price of GH¢3 per share. The market price of the existing shares before the rights issue is GH¢3.70.
Required:
i) What is the theoretical ex-right price?                                                                          (3 marks)

ii) What is the theoretical value of the rights?                                                                  (3 marks)

i) Explain the concepts stock split and scrip issue and identify the main difference between the two.                            (3 marks)

ii) Explain why a company will embark on scrip issue?                                                                                                    (2 marks)