Question 1 (8 Marks) ABC Ltd.has 7,000,000 shares with a market prices2.50.I wan
ID: 2789255 • Letter: Q
Question
Question 1 (8 Marks) ABC Ltd.has 7,000,000 shares with a market prices2.50.I wants to raise S1. 00,000 chrough a 1 for 7 renounceable rights issue. A shareholder, Fred, holds 1,400 ABC shares and has a personal bank balance of $5,000. t wants to raise $1,700,00 Required: Calculate the ex-rights price of a share. Calculate the value of one right. Calculate Fred's total wealth after the rights issue ifhe exercises (uses) 60% ofhis rights. (a) (b) (c) (d) All of the above relate to a renounceable rights issue. Explain the diference between a renounceable rights issue and a non-renounceable rights issue.Explanation / Answer
a) Ex-rights price =
=Fair value of share immediately prior to right issue+ total amount received fromexercise / Total no of shares after right issue
=(7000000*2.5) + 1700000 / [(7000000 + (7000000/7)]
=17500,000+1700,000/8000000
=19200,000/8000,000
=$2.4
b) Company's offer price = 1700,000/1000,000 = 1.7$
Statement showing Value of right
Average price per share = 19.2/8 = $2.4
Value of right = market price - average price
=$2.5-2.4
=0.1$
C) no of shares offered to fred = 1400/7 = 200 Shares
he exercises 60% of his right i.e applies for 200*60% = 120 shares
Total no of shares he holds after right issue = 1400+120 = 1520 shares
Fred's total wealth = 1520*2.4 + 5000
=3648+5000
=$8648
D) Main difference between renounceable right issue and non-renounceable right issue is that renounceable right issue can be transferred to another person while non-renounceable right issue can not be transferred it will lapse if the original investor to whom offers is made declines
Particulars Amount Market value of shares already held by share holder(7*2.5) 17.5 Add: price to be paid for one right share 1.7 Total(for 8 share) 19.2Related Questions
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