Company A is proposing a rights issue to finance a new investment.

C. True – If the new project has a positive NPV, the company’s total value increases, so the actual ex-rights price can be higher than the purely mechanical TERP, which ignores project NPV.

E. True – Under Modigliani & Miller with tax, the cost of equity increases with gearing (more debt → more financial risk). A rights issue used to finance a project reduces D/E, so the cost of equity will fall compared with a more highly geared structure.

The others are false:

A. No rule that the issue price must be 20% below the market price.

B. A deep discount encourages take-up but cannot guarantee it.

D. Low gearing would usually allow more debt, not force an equity issue.