Question

In 2012, the Pandora Box Company made a rights issue at €8 a share of one new share for every two shares held. Before the issue there were 9.3 million shares outstanding and the share price was €10.

Now suppose that the company had decided to issue the new stock at €7 instead of €8. e. How many new shares would the firm have needed to sell to raise the same sum of money? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

f. What would be the new value of the opportunity given to shareholders to buy one new share for less than the market price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

g. What would be the prospective stock price after the issue? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

h. Now how far could the total value of the company fall before shareholders would be unwilling to take up their rights? (Do not round intermediate calculations. Enter your answer in millions of euros rounded to 1 decimal place.)

Answer 1

Information:-
Shares outstandin before right issues		9.3 Miilion
Right issue ratio		1:2
Right shares		4.65 Million
Right issue price		€       8.00
Money raise from issue		€     37.20	Million
Answer to part 'e'
If right issue price equal to euro 7, how many new shares to be issued
= (37.20 / 7) - 4.65
= 5.3142857 - 4.65
= 0.6642857 million
Answer to part 'f'
Value of right
Shares have to be hold		2
Market value of share		€     10.00
Market value of two shares		€    20.00
Add:- Right share price		€       7.00
Price paid for three shares		€    27.00
Average price		9
Value of opportunity = 10 - 9 = 1 euro/share
Answer to part 'g'
Prospective stock price after issue
= (Old shares * Old price + New Shares * issue price ) / (Old shares + new shares)
= (9.30 * 10 + 4.65 * 7) / (9.30 + 4.65)
= Euro 9
Answer to part 'h'
Prospective stock price if right issue not subscribed
= (Old shares * Old price + New Shares * issue price ) / (Old shares + new shares)
= (9.30 * 10 + 4.65 * 0) / (9.30 + 4.65)
= Euro 6.66