Global ltd., a pharmaceutical company, has concluded that additional equity fina

Question

Global ltd., a pharmaceutical company, has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights issue. Global is planning to raise £30 million to finance its operations while the number of outstanding shares is 4 million. The shares of the company are currently selling for £30 per share.
a) If the subscription price is set at £20 per share, how many shares must be sold?
b) How many rights will it take to buy one share?
c) What is the ex-rights price and the value of a right?
d) Show how a shareholder with 500 shares before the offering and no desire (or money) to buy additional shares is not harmed by the rights offer.

Explanation / Answer

a. Shares to be sold = 30m/ 20 = 1.5 million

b. Rights for buying one share =4m/ 1.5m = 2.67

c. Suppose an investor has 267 share of the Company. MV of his investment before rights issue = 267* 30 = 8010

MV of investment after rights issue (100 rights) = 8010+2000= 10010

Ex rights price = 10010/ (267+100) = $27.28

Value of a right = 30- 27.28 = $2.72

d. MV of shares before rights offer = 500* $30 = 15000

Number of rights to which he is entitled = 500

MV of his shares = (500)*27.28 + 500*2.72 = $15000

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