QUESTION 1 (Show all workings) (a) Explain and define the concept of \'intrinsic

Question

QUESTION 1 (Show all workings) (a) Explain and define the concept of 'intrinsic value' as it is used in finance? In investors 'intrinsic value' for an asset, what things should we consider? s Ltd has 1.5 million issued shares wh (b) Mt. Panorama MotorSport at $8.90 per share. The firm wishes further research and development of its cutting edge engine booster announced a rights issue at a subscription price of $5 per share to raise the ich are currently trading to raise an additional $6 million in equity capital to fund product. The firm has )How many shares must be issued to raise the required funds? How many shares does an existing shareholder need to hold to be eligible to apply for one right? (i) What is the theoretical value of one right attached to an existing share? (iv) What is the value of one share trading ex-rights? (v) Although a rights issue allows shareholders to purchase shares below market value, it may not increase shareholder value". Explain this statement and why the value of a right is described as being theoretical

Explanation / Answer

Solution 1) a) :

The term intrinsic value can be defined as the estimated value arrived after applying the fundamental principles and concepts to arrive the value of a stock, securities, or a product and compared with the market value.

It is calculated by the investors to have a proper investment and considered both qualitative and quantitative factors like the business model, the governance, and ratios of the company.

The discounted cash flow method is one of the methods which is commonly used to arrive at the intrinsic value of stock or product by projecting the future cash flow of the product.

We should consider: 1) the free cash flow of the company

2) The growth rate

3) the discounted rate at which we will discount the cash flow

4) Competitive advantage

5) Industry factor

solution b)

i) the total number of shares to be issued by the Panorama Motorsport ltd = 6 million / 5 per share

= 1.2 million shares

ii) The existing shareholders to hold how many shares is computed as below:

Stock price - Subscription / No of rights required to purchase one share + 1

= 8.9 - 5 = 3.9

No of rights required to purchase one share = 1.5 / 1.2 + 1

= 2.25

hence the value of right = 3.9 / 2.25 = 1.74.

iii) The theoretical value of the right = (Market value of share prior to right + cash raised )/ Total shares after rights

= (13.35 + 6 )/ 2.7

= 19.35/2.7 = 7.17 will be the theoretical right price.

iv) To compute the value of ex right :

= stock price - subscription /The number of right required to purchase one share .

3.9 / 1.25

= 3.12

Thank you

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.