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Nikos has 5 shares in ABC. The current share price is 60 euros. Nikos also has...

Nikos has 5 shares in ABC. The current share price is 60 euros. Nikos also has € 48 cash, while at the moment his portfolio consists of shares and cash. Nikos has just been informed that ABC will increase its share capital with preference rights. The terms of the increase are 1 new share to 5 old shares at the price of 48 euros. Calculate:
A) The price of the right and what is the value of Nikos' portfolio before the share capital increase.
B) If Nikos participates in the increase with rights and buys shares, what will be the value of his portfolio?
C) If he sells all the rights, but keeps the shares and keeps the cash, what is the value of his portfolio?
D) If he sells all the rights and all the shares and keeps the cash, what is the value of the portfolio?
E) If Nikos can't decide what to do, which of the options b, c, d will benefit him the most?

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Expert Solution

Ans:

A.

Calculation of Price of Right:

Current price of the share: €60

Number of share required to buy a right : 5

Value of a right share: €48

Total share after right share : 6

Value of 6 shares after right issue : (€60*5 + €48*1) = €348

Value of each share after right : €348/6 = €58

Value of right : Value of each share after right - value of righ share

= €58 - €48

=€10

Value of Portfolio before share capital Increase : Number of share*share price + Cash

= 5*€60 + €48 = €348

B.

If Nikos buy right share:

No. of shares he have after buying right shares : 6

Value of shares after right: €58

Cash left : €0

Value of Portfolio : 6*€58 = €348

C.

If Nikos sells right @ : €10

No. of shares holding : 5

Value of shares after right: €58

Cash left : €48 + €10 =€58

Value of Portfolio : 5*€58 + €58 = €348

D.

If Nikos sells right @ : €10 & Sells all shares @ market price after right issue i.e. €58

No. of shares holding : o

Sale value of shares: €58*5 = €290

Cash left : €48 + €10 + €290 = €348

Value of Portfolio = €348

E.

As the value of portfoilio will remain same in all the options Nick can choose any of the above, however to keep a mix portfolio of cash and shares he must choose option C and sells the Right @ €10.

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ekkarill92 answered 1 year ago
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