Question

Victoria and Vine (V&V) has 1 million shares outstanding, selling at $20/share. To finance the expansion of their winery business V&V is planning a rights offering, allowing one new share to be purchased for each 10 shares currently held. The purchase price (subscription price) will be $14.50 a share.

a)How many shares will be issued? (1 Mark)

b)How much money will be raised? (1 mark)

c)What will the stock price be after rights issue (ex-rights)?

d)What action(s) would you have to take in the rights offering if you wanted to maintain your ownership? No Calculations required. (1 Mark)

Please show all of your work.

Answer 1

Facts of the case:

Shares Outstanding = 1000000

Price prior to rights issue = $20/share

Rights Offering = 1 share for every 10 shares held

Subscription price = $14.50

a] Shares to be issued = Shares Outstanding / Rights offering

= 1000000/10 = 100000 shares

b] Money will be raised =Rights shares*Subscription price

= 100000*14.50 = 1450000

c] Stock price be after rights issue (ex-rights) = [Shares outstanding prior to right issue * Price per share prior to rights issue] + [Number of rights share * Subscription price] / [Shares outstanding prior to right issue + Number of rights share]

Shares outstanding prior to right issue = 1000000

Price per share prior to rights issue =20

Number of rights share =100000

Subscription price =14.5

Stock price be after rights issue (ex-rights) = [1000000*20] + [100000*14.50]/1000000+100000

=20000000+1450000/1100000 = 21450000/1100000 =$19.50 / share

d] Action we have to take in the rights offering if we want to maintain our ownership is:

     Exercise the rights option or

      Renounce the right to another person for a price