Response to the following problem:
Brocmar plc has 10m ordinary £0.50 shares in issue. The market price of the shares is £1.80. The board of the business wishes to finance a major project at a cost of £2.88m. Forecasts suggest that the implementation of the project will add £0.4m to after-tax earnings available to ordinary shareholders in the coming year. After-tax earnings for the year just completed were £2m, but this figure is expected to decline to £1.8m in the coming year if the project proposed is not undertaken. A rights issue at a 20 per cent discount on the existing market price is proposed. Issue expenses can be ignored.
Required:
(a) To assist the board in coming to a final decision, you are required to present information in the following format:
? Project not undertaken
(i) earnings per share for the coming year.
? Project undertaken and financed by a rights issue
(ii) rights issue price per share
(iii) number of shares to be issued
(iv) earnings per share for the coming year
(v) the theoretical ex-rights price per share. All workings should be shown separately.
(b) What information, other than that provided in the question, is needed before the board can make the investment decision?