(10 marks)
To compensate Darwin Brighton’s retail shareholders for not being eligible to take part in the capital raising,
the Board of Darwin Brighton is considering a return of capital. They are considering a 3 cent a share payment now.
The board is considering whether to pay this out of its retained profits or additional borrowings. Shareholders have an option to take the cash payment or to reinvest back into the company.
Please answer the following questions
a.) How would you expect the share price to change for either of the two options when the company makes the announcement? Give brief reasons for your answer, taking into account the cost of capital.
(5 marks)
b.) The company allows shareholders to reinvest their cash proceeds back into the company. What are two factors that shareholders will consider in deciding whether to take the cash proceeds or to reinvest it back into the company? (5 marks)
