Which TWO of the following statements are true?

Company A is proposing a rights issue to finance a new investment. Its current debt to equity ratio is 10%.

Which TWO of the following statements are true?

A. The issue price has to be at least 20% below the pre-rights share price.

B. The issue price of new shares should be set to guarantee the full take up of shares offered.

C. The actual ex-rights price may be higher than the theoretical ex-rights price due to the value created from the project.

D. Company A’s current low gearing ratio may require a rights issue rather than a debt issue to finance the new project.

E. According to Modigliani and Miller’s Theory of Capital Structure with tax, the rights issue will result in a lower cost of equity for Company A.

Answer: C,E