Mike owns 4,000 shares in County Ltd, whose current share price (cum rights) is trading at...

Mike owns 4,000 shares in County Ltd, whose current share price (cum rights) is trading at $4.30 per share. County Ltd has been making large profits and wishes to distribute more dividends out to their loyal shareholders. However, they don’t want to change to current dividend payout (amount). They then consider making a share 3 for 4 rights issue with a subscription price of $3.50 per share. Mike wishes to calculate:

a) The value, R of the right to buy 1 new share

b) The ex-rights share price, X

c) The value of his investment cumulative rights and ex-rights

Solutions

Expert Solution

Issue price per share = $3.50

Rights ratio = 3:4 ie. 3 rights share for 4 shares held.

Current selling price of share = $4.30

Current shares outstanding = 4,000 shares

Rights shares to be issued = 4,000 x (3 / 4) = 3,000 shares

Ex-rights price per share = [(Current selling price x Current oustanding shares) + (Right issue price x Rights shares issued)] / (Current oustanding shares + Rights shares issued))

Ex-rights price per share = [($4.30 x 4,000 shares) + ($3.50 x 3,000 shares)] / (4,000 shares + 3,000 shares)

Ex-rights price per share = $3.96

a) The value, R of the right to buy 1 new share

Ex right price per share = $3.96

Issue price of right = $3.5

Rights Value = $3.96 - $3.5 = $0.46

b) The ex-rights share price, X

Ex right price per share = $3.96

c) The value of his investment cumulative rights and ex-rights

Value of investment = Ex right price x no. of shares after rights issue = $3.96 x 7,000 shares = $27,720

ekkarill92 answered 1 year ago

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