Please answer all parts TUV Guy Inc. is proposing a rights offering. There are c

Question

Please answer all parts

TUV Guy Inc. is proposing a rights offering. There are currently 240,000 shares outstanding at $80 each. There will be 60,000 new shares offered at $60 each.
                                                                                                    

a) What is the new market value of the company?

b) How many rights are associated with one of the new shares?

c) What is the value of a right?

d) What is the ex-rights price per share?

e) Why might a company have a rights offering rather than a general cash offer?

Explanation / Answer

(a) Computation of New market value of the company after right issue.We have,

New market value of the company = (240,000 x 80) + ( 60,000 x 60) = 19,200,000 + 3,600,000 = $ 22,800,000

Hence, The new marekt value of the company = $ 22,800,000

(b) Computation of number of rights associated with one of the new shares.We have,

Proportion = 240,000 / 60,000 = 4 shares.

Hence, the number of rights associated with one of new shares is 4.

(c) Computation of value of right.We have,

Value of right = Market value - Average value = 80 - 76 = $ 4.00

Hence, the value of right is $ 4.00

(d) Computation of ex- rights price per share.We have,

Ex-Right price per share = ( Market value of share prior to right issue + Market value of right issue) / Number of share after right issue

Ex-Right price per share = ( 240,000 x 80 + 60,000 x 60) / ( 240,000 + 60,000)

Ex-right price per share = 22,800,000 / 300,000 = $ 76.00

Hence, Ex-right price per share is $ 76.00.

(e) A company might have a rightss offering rather than a general cash offer. It is because:

(i) A right share offering have less cost than a general cash offer.

(ii) Right share issue protects the interest of shareholder proportionatly.

(iii) Right share issue also protects againsts underpricing.

Particulars Calculations Value ($) Market value of share already held by shareholders(4 shares) 4 x 80 320 Add: Price to be paid for buying one share 60 Total Shares ( 5 shares) 380 Average price of one shares 380/5 76

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