4 - Sources of Finance

Question 1

Ex issue price

Answer 1

(Old MV of company + cash raised + NPV of any project) / New total number of shares

Question 2

Value of a right per new share

Answer 2

Ex rights price - exercise price

Question 3

Change in Shareholder wealth

Answer 3

shares before issue x share price before issue

vs

# shares after issue x ex rights price
\+/- any cash received/paid

Question 4

Factors to consider when choosing sources of finance

Answer 4

• Cost (raising and servicing debt)
• Gearing
• Control
• Security
• Cash flows
• Availability
• Exit routes

Question 5

Characteristics of a semi-strong efficient market

Answer 5

• all publicly available information is reflected in the share price
• can only consistently beat the market by using insider information
• new information hits the share price when published

Question 6

Behavioural issues affecting Market Efficiency

Answer 6

• overconfidence and miscalculation of probabilities
• conservatism and cognitive dissonance
• availability bias and narrow framing
• representativeness and extrapolation explanation