Question

Myer Holdings Limited has a share price of $2.82. The company has made a renounceable rights issue offer
to shareholders. The offer is a three-for-ten pro-rata issue of ordinary shares at $2.60 per share.

What is the theoretical ex-rights share price of the firm? What is the value of the right?

Explain the effect of the offer being renounceable. Explain why an actual ex-rights price of a share may at
times differ from the calculated theoretical price.

Answer 1

What is the theoretical ex-rights share price of the firm?

Let’s calculate theoretical ex-rights share price of the firm;

Right price of the share	$2.82
Thus market value of 10 right shares ($2.82 * 10)	$28.20
Add: Price of 3 shares (3 * $2.60)	$7.80
So, Market value of 13 shares ($28.20 + $7.80)	$36
Theoretical ex-rights share price of the firm ($36 / 13 shares)	$2.77 (Approx.)

What is the value of the right?

Following is the formula of value of right;

Value of right = N (Right price – Subscription price) / (N + 1)

A per information of the question following information is given;

N = (10 / 3) = 3.33

Right price = $2.82

Subscription price = $2.60

Now let’s put the values in the formula;

Value of right = 3.33 ($2.82 – $2.60) / (3.33 + 1)

= 0.7326 / 4.33

= 16.92%

Explain the effect of the offer being renounceable;

Renounceable refers to selling of rights of shares to third party or other individuals. Thus we can say that in case of renounceable rightsholders can sell his own rights to other party this is because of listed of shares in stock market.

We also know that right issue gives opportunity to its’ existing shareholders for getting some more shares. Hence under right issue shares are given to existing shareholders on pro-rata basis.

Explain why an actual ex-rights price of a share may at times differ from the calculated theoretical price;

Yes’ it is quite possible that an actual ex-rights price of a share may at times differ from the calculated theoretical price. Main reason behind such difference is the informational content of the rights issue. Whenever equity base is increased, it means that company’s growth and profitability is improved hence as a result it leads a company for maintaining its dividend rate.