1. Chapter 8 FIGURE 8.1 PROJECT RISK AND RETURN FIGURE 8.2 PARTICULAR REINVESTMENT RETURN REQUIREMENTS WORKING INSIGHT 8.6 IMPACT OF RIGHTS ISSUES ON SUBSTANTIAL SHAREHOLDERS WORKING INSIGHT 8.9 A BONUS ISSUE AND A SHARE SPLIT

2. FIGURE 8.1 PROJECT RISK AND RETURN Project Risk Project Expected Return Project risk-return line A B Company cost of capital Company overall risk factor Project A should be accepted Project B should be rejected

3. FIGURE 8.2 PARTICULAR REINVESTMENT RETURN REQUIREMENTS Project Risk Project Expected Return Increasing return Company cost of capital Company overall risk factor Minimum return Foregone low-risk opportunities

4. WORKING INSIGHT 8.6 IMPACT OF RIGHTS ISSUES ON SUBSTANTIAL SHAREHOLDERS TAKING UP THE RIGHTS Original investment is 100m @ 50p = 50.00m Paid for new shares: 25m @ 45p = 11.25m So the shareholder now owns 125m shares, and has 11.25m less cash than previously. 125m @ 49p gives an investment value of £61.25m Less, the cash paid of £11.25m Net value to the shareholder is 61.25 – 11.25 = £50m SELLING THE RIGHTS Original investment is 100m @ 50p = 50.00m Sell each right @ [49 – 45] = 4p per share Receive 25m @ 4p = £1m So the shareholder now owns 100m shares valued at 49p = £49m Plus, she has cash to the value of £1m Total value to the shareholder is £50m Holder of 100m shares trading at 50p has the right to buy another 25m shares @ 45p each in a one-for-four rights issue. Theoretical post-right price is ([50p x 4] + 45p) / 5 = 49p per share

5. WORKING INSIGHT 8.9 A BONUS ISSUE AND A SHARE SPLIT BonusCoSplitCo Capital structure prior to transaction Share capital 100000 shares @ £1 par value100 000 Retained profits250 000 350 000 After a bonus issue of one for four shares: Share capital 125000 shares @ £1 par value125 000 Retained profits225 000 350 000 After an 1.25 for one share split: Share capital 125000 shares @ 80 p par value100 000 Retained profits250 000 350 000