Mayo plc is financed by 31 million shares of equity with a market capitalisation of...
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Mayo plc is financed by 31 million shares of equity with a market capitalisation of 74.4 million, and debt with a face value and market value of30 million. The interest rate on the debt is 7.5% and debt interestis tax deductible. The firm's most recent earnings before interest and tax is 16.25 million. The corporate tax rate is 21%. There are no market imperfections apart from corporate tax. Suppose the firm decides to change its capital structure by holding a rights issue to raise enough cash to reduce the debt to 15 million. The rights price will be at a 20% discount offthe current share price. a) What will be the change in wealth for a shareholder who had 1000 shares in Mayo before the rights issue? Why? Will the rights issue succeed? Explain
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