Question

Acme want to raise $3million new equity via a rights issue with a subscription price of $4/share. Current shares sell (rights on) for $50 each. Calculate the minimum current value of a right and the ex-rights share price assuming there are 1 million shares outstanding before the rights issue. Check your ex rights share price using another formula.

Answer 1

Acme
Amount to be raised by rights issue=	$            4,000,000
Rights subscription price per share =S	$                            4
No of Rights sharte to be issued=$4M/4=	1,000,000
No of Existing Share =	1,000,000
No of Existing shares required for Each Right Issue =N=	1.00
Market Price per share of Existing Shares=P0	$                    50.00
Ex Rights Price =(N*P0+S)/(N+1)=(1*50+4)/(2)=27
So Ex Rights Price per share =$27
Checking other way:
Current Market Capitalization :=1M*$50=	50,000,000.00
Add: New Rights Issue Share values @$4 each	4,000,000.00
Total Market Capitalization after rights issue	54,000,000.00
Total Outstaning Shares after Rights issue =	2,000,000.00
Ex Rights value per share =$54M/2M=	$                    27.00
Min Rights value =(P0-S)/(N+1)=(50-27)/2=23/2=11.5
Min Current Value ofa Right =$11.5