Cima F3 Exam Question No 5

Question No 5:

A listed company plans to raise $350 million to finance a major expansion program. The cash flow projections for the program are subject to considerable variability. Brief details of the program have been public knowledge for a few weeks. The directors are considering two financing options, either a rights issue at a 20% discount to current share price or a long term bond. The following data is relevant: The company's share price has fallen by 5% over the past 3 months compared with a fall in the market of 3% over the same period. The directors favor the bond option.
However, the Chief Accountant has provided arguments for a rights issue. Which TWO of the following arguments in favor of a right issue are correct?

A. The issue of bonds might limit the availability of debt finance in the future.
B. The recent fall in the share price makes a rights issue more attractive to the company.
C. The rights issue will lead to less pressure on the operating cash flows of the program.
D. The WACC will decrease assuming Modigliani and Miller's Theory of Capital Structure without taxes applies.
E. The administrative costs of a rights issue will be lower.

Answer: A, C