The following financial information relates to MFZ Co, a listed company:
MFZ Co has 12 million ordinary shares in issue and has not issued any new shares in the period under review. The company is financed entirely by equity, and is considering investing $9·2 million of new finance in order to expand existing business operations. This new finance could be either long-term debt finance or new equity via a rights issue. The rights issue price would be at a 20% discount to the current share price. Issue costs of $200,000 would have to be met from the cash raised, whether the new finance was equity or debt.
The annual report of MFZ Co states that the company has three financial objectives:
Objective 1: To achieve growth in profit before interest and tax of 4% per year
Objective 2: To achieve growth in earnings per share of 3·5% per year
Objective 3: To achieve total shareholder return of 5% per year
MFZ Co has a cost of equity of 12% per year.
Required:
(a) Analyse and discuss the extent to which MFZ Co has achieved each of its stated objectives. (7 marks)
(b) Calculate the total equity market value of MFZ Co for 2014 using the dividend growth model and briefly discuss why the dividend growth model value may differ from the current equity market value. (5 marks)
(c) Calculate the theoretical ex rights price per share for the proposed rights issue. (5 marks)
(d) Discuss the sources and characteristics of long-term debt finance which may be available to MFZ Co. (8 marks)