a. Kianjoya Ltd has 2 million ordinary shares outstanding at the current market price of KES 60 per share. The company requires KES 8 million to finance a proposed expansion project. The board of directors has decided to issue a 2- for -25 rights at a subscription price of KES 1,660,000. Information on this project will be released to the market together with the announcement of the rights issue. The company paid a dividend of KES 6 per share last year. This dividend, together with the company’s earnings is expected to grow at 6% annually.
i. Compute the price of the shares after the announcement of the rights issue but before they start selling ex-rights. (9 marks)
ii. Compute the theoretical value of rights and the theoretical ex-rights price of the shares. (6 marks)
b. Identity and explain three methods of handling risks in capital budgeting. (10 marks)
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