FIN304: Decision Making for Financial Managers On 18 December 2019, Japfa Limited, an industrial agri-food company listed on the Singapore Exchange (SGX) announced a proposal to raise funds via a rights issue. The stock closed at $0.575 that day, and the announcement was made after the market close. The Offer Information Statement (OIS)

On 18 December 2019, Japfa Limited, an industrial agri-food company listed on the Singapore Exchange (SGX) announced a proposal to raise funds via a rights issue. The stock closed at $0.575 that day, and the announcement was made after the market close. The Offer Information Statement (OIS) lodged with the Monetary Authority of Singapore is dated 14 January 2020.
You are discussing this rights issue with a friend. Use the information on the rights issue from the OIS, which can be retrieved from the SGX website, to answer the following questions:

Question 1

(a) Calculate the subscription price discount.

(b) Your friend says that the subscription price discount is small because shares that are not subscribed by existing shareholders will be taken up by DBS Bank Limited. Assess your friend’s statement, quantitatively if applicable.

(c) Compute the theoretical ex-rights price (TERP) of Japfa Limited, using the “Maximum Scenario” as described in the OIS.

(d) Your friend says that Yahoo! Finance will reflect an opening stock price of Japfa Limited on the ex-rights date that is equal to the TERP that you calculated in part (a). Evaluate your friend’s statement, quantitatively if applicable.

(e) Calculate the value of a “nil-paid” right.

(f) Your friend says that the right is called “nil-paid” because existing shareholders were granted the right by the company without having to pay anything for it. Assess your friend’s statement, quantitatively if applicable.

Question 2

(a) Suppose you invested $10,350 in Japfa’s stock just before the market closed on the announcement date of the rights issue. Your friend says that markets are efficient and that you are protected even if you ignore the rights issue. Evaluate his proposed option relative to the options of buying the rights shares or trading the “nil-paid” rights, quantitatively if applicable.

(b) Your friend says that this rights issue does not allow you to sell the rights and that, in such a rights issue, you are essentially forced to invest more money in the stock, so exercising the rights and selling the rights are not value-equivalent options. Assess your friend’s statement, quantitatively if applicable.

(c) Another friend joins the conversation. She says that, after 31 January 2020, which is expiration date for the rights shares, if you do not exercise the rights, the value associated with the rights vanishes into thin air. Assess this other friend’s statement, quantitatively if applicable.

(d) One friend says that this rights issue will cause Japfa’s projects to be more attractive from an NPV standpoint, while the other insists that the capital raising exercise will cause Japfa’s projects to be less attractive. Appraise their arguments.

Question. 3

You have just graduated, are dead broke, but would still like to buy a new car so that you can show it off on Instagram. Your rich Aunt Amy, who is a retired investment banker at the age of 35 because she knew better, is willing to lend you the money to buy the car, as long as you promise to pay her back in four years. You propose to pay her the rate of interest she would otherwise get by putting the money in the bank, which has deposit and loan rates of 2% and 6%, respectively. Based on your projected income and living expenses, you anticipate that you will be able to pay her $30,000, $40,000, $45,000, and $50,000 at the end of each of the next four years, respectively.

a) If your aunt accepted your proposal, how much would she be willing to lend you today?

b) How much would your aunt have in four (4) years if she chooses not to lend you the money?

c) How much would your aunt have in four (4) years if she chooses to lend you the money?

d) Based on your calculations in parts (b) and (c), you believe your aunt should be indifferent between lending you the money or putting the money in the bank. Discuss whether she would agree with your assessment.

e) Suppose your aunt proposes to make you indifferent between borrowing from her or borrowing from the bank instead. How much would she be willing to lend you today?
(f) You and your aunt eventually agree to an interest rate of 4%. Explain whether you win, whether your aunt wins, and how such an outcome can be possible.

Question.4

You would like to purchase a private condominium that costs $1.2 million, and you are shopping around for a housing loan. As this is your first housing loan, the Monetary Authority of Singapore (MAS) allows you to have a loan-to-value (LTV) limit of 75%. Also, you are required to maintain a total debt servicing ratio (TDSR) of 60%. The best deal you could find is by the Digital Bank of Singapore (DBS), which offers a fixed-rate loan of 1.8% per annum and makes a net interest margin of 0.6% per annum. You would like to take out a loan for 35 years and do not have any other outstanding debt.

(a) How much must your gross monthly income at least be in order to afford this condominium?

(b) Suppose you are able to take out this loan. Without constructing a loan amortisation schedule, calculate the total amount of interest you would pay over the life of the loan.

(c) Is your calculation in part (b) technically appropriate? If yes, explain why. If not, come up with an alternative measure of the dollar cost of borrowing that is technically appropriate and interpret that measure.

While you are browsing the bank’s website, you find that DBS quotes an interest rate of 1.6% per annum on a car loan. Incidentally, you are thinking about buying that cheapest possible Mercedes A-Class Saloon, which costs $180,000. MAS rules restrict financing to 60% of this car for a maximum loan tenure of 7 years which you plan to max out. The terms of the loan contract state that monthly payments are computed using the following formula:

(d) Assess whether the housing loan or the car loan is more expensive by comparing appropriate annual rates.

(e) If the conclusion reached in part (d) is different from the conclusion reached through a  comparison of rates quoted by DBS, explain why. Also, explain why the rate of one loan type should be higher than the rate of another loan type