Question 9.Act.4: Suppose that Merton plc (see Example 9.1) replaces the £30,0...
Suppose that Merton plc (see Example 9.1) replaces the £30,000 paid out as dividends by an issue of shares to new shareholders. Show the statement of financial position after the new issue and calculate the value of shares held by existing shareholders after the issue.
The statement of financial position following the new issue will be almost the same as before the dividend payment was made. However, the number of shares in issue will increase. If we assume that the new shares can be issued at a fair value (that is, current market value), the number of shares in issue will increase by 15,000 shares (£30,000/£2.00 = 15,000).
| Statement of financial position following the issue of new shares | |
| £000 | |
| Assets at market value (exc. cash) | 60 |
| Cash | \underline{30} |
| \underline{90} | |
| Ordinary (equity) capital (45,000 shares) plus reserves | \underline{90} |
The existing shareholders will own 30,000 of the 45,000 shares in issue and will therefore own net assets worth £60,000 (30,000/45,000 × £90,000). In other words, their wealth will not be affected by the financing decision.