C608 609 Assessment 2 FINAL- Word yout References Mailings Review View Design La

Question

C608 609 Assessment 2 FINAL- Word yout References Mailings Review View Design Layout Font Paragraph Styles The Large Co. Limited wishes to raise additional capital by $2,000,000 by a rights issue to existing shareholders. The issue will be on the basis of 1 for 4 at a subscription price of $2.50 per share. The current market price is $3.00 per share Required a) Calculate the value of the right to acquire one new share. b) Calculate the theoretical market price of the shares once the new shares have been issued. c) The holder of 2,000 shares is unsure whether to sell his rights or take up the offer. You are asked t advise him. iD

Explanation / Answer

Share price before right issue 3 Rights required for new share 4 Subscription price 2.5 Share price after right issue= (Before right price * Shares required for right share + New subscription price)/Old share + Right share Share price after right issue= ((3*4)+2.5)/(4+1) Share price after right issue=          2.90 Value of 1 right =3-2.9 Value of 1 right          0.10 Value of 1 right to acquire 1 share 4*0.10          0.40 Shareholder holding 2000 Shares Stock Valuation before right 2000*3        6,000 There will be no impact if shareholder either exercise his right or sell his rights Stock valuation after right issue 2000*2.9        5,800 Cash proceed from right sale 2000*0.1 200 Total wealth        6,000 If Rights are used to purchase additional share Old share        2,000 Right shares-2000/4            500 Total Share        2,500 Share price after right issue                3 Total Wealth        7,250 Less value paid for right shares-500*2.5 -1250 Effective wealth        6,000 If no action is taken by shareholder Total wealth 5800 old wealth 6000 Loss -200

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