Question

Rights Issue Micro-Electronics Corporation (MEC) has just announced that it will issue 10 million shares of common stock through a rights issue at a subscription price of $25. Before the announcement, MEC shares were trading at $31, and there were 100 million shares outstanding.

a. How many rights will MEC grant to its existing shareholders?

b. How many rights will an investor need to buy one new share?

c. What will happen to MEC's share price when the rights issue is announced?

d. What should be the value of right?

Please show all your work.

Answer 1

(a) As there are total 100 million shares are outstanding and company will give 1 right to every shareholder, so there will be total 100 million rights will be issued.

(b) As company is going to issue 10 million shares as rights shares against 100 million rights, the ratio is 10:1, that is an investor needs 10 rights to buy one new share

(c) MEC's share price will come down as a result of rights issue.

ANY DOUBTS, FEEL FREE TO ASK, GIVE RATINGS PLEASE TO ENCOURAGE US

existing value of share = 100 million x $31 = $3100 million

rights shares are issued at $25, so value of right shares = $250 million

so total value = $3100 million + $250 million = $3350 million

and total shares will be 100 million + 10 million = 110 million

so after right shares, the value of share will be $3350/110 = $30.45 per share answer

(d) value of right = current price - share price after rights issue = $31 - $30.45 = $0.55