(25 Marks)
Write your answers in an MS Word document
Unless instructed otherwise, please round off your values to the nearest dollar or % correct to
two decimal places and include a comma separator for your numbers.
Question 1 (15 marks)
Darwin Brighton wants $400 million to finance the purchase of Hepal. This will cover the amount paid to
buy the assets as well as working capital. This amount does not include underwriting fees.
The company will seek the service of Freemans Capital to act as the broker to complete the transaction. As
part of the deal, Freemans Capital will underwrite the offer of up to $30 million of new shares.
Freemans Capital will charge 3% fees on total capital raised. This amount covers for the underwriting,
administrative costs and the capital raising process.
Freemans Capital will organise this financing by selling $250 million of debt. The remaining component will
comprise of new shares.
Freemans Capital used the open auction method to institutional and wholesale investors to determine that
the offer price of the new shares will be $1.20. No retail investors will participate in this sale.
Recall Darwin Brighton currently has 750 million shares and the shares trade at $1.40. It also has $325
million in net debt, with a weighted average duration of 4.6 years and interest rate of 4.5% p.a.
Please answer the following questions
a.) What is the total amount of capital that Freemans Capital needs to raise for Darwin Brighton? (2 marks)
b.) How many new shares will Freemans Capital sell? (2 marks)
c.) Calculate the theoretical ex–rights price for Darwin Brighton. (3 marks)
d.) What is the size of the working capital and hence the net debt of Darwin Brighton afterwards?
(3 marks)
e.) Calculate the gearing ratio of Darwin Brighton after the raising, based on the market value of equity
after the raising using the theoretical ex–rights price. (2 marks)
f.) What is the effect on the offer price of the new shares if Freemans Capital does not underwrite the
capital raising? Give reasons for your answer. (3 marks)
