Lexbel plc generates earnings after tax (PAT) of 20% on shareholders’ funds. Its current capital structure is as follows: Ordinary shares of 50p each £300,000 Reserves £400,000 Total: £700,000 The...

Lexbel plc generates earnings after tax (PAT) of 20% on shareholders’ funds. Its current capital structure is as follows:

Ordinary shares of 50p each £300,000

Reserves £400,000

Total: £700,000

The board of Lexbel plc wishes to raise £180,000 from a rights issue in order to expand existing operations. Its return on shareholders’ funds will be unchanged. The current ex-dividend market price of Lexbel plc is £1.90. Three different rights issue prices have been suggested by the finance director: £1.80, £1.60 and£1.40.


Present your results in a tabular form and critically evaluate the best option among the three right issues