Question

Fund manager Alex has an income portfolio consists of Asia-Pacific large-cap stocks. The total size of the portfolio is $100mn, one of his stocks named ATC Pty Ltd accounts for 3% of the portfolio. The company announced a 1 for 4 rights issue with a subscription price of $2.20 per share. The current share price is $3.00 per share.

a) Please work out the value of right and ex-right share price.

b) Explain the changes of investment value c-u-m rights and ex-rights.

c) How will the investment value change if it is a 1 for 2 rights issue? (1 mark)

Answer 1

Total size of portfolio is $ 100 mn. Now ATC Pty Ltd accounts for 3% of the portfolio.

So Portfolio Value in ATC Pty Ltd is $ 3 mn.

current share price is $ 3.00 / Share

so Total no of Shares = $ 3 mn / $ 3 per Share

Total no of Shares = 1 mn

Now Company announced 1 for 4 rights issue with a subscription price of $2.2 per share.

so they will have rights of 2,50,000 shares since they are holding 1 million shares.

a) Now if fund manager subscribe for the rights then ,

Total investment in rights = $2.2 / Share * 2,50,000

Total  value of rights = $5,50,000

So Total No of Shares = 12,50,000

Total Investment = $ 35,50,000

Value of ex-right share price = Total Investment / Total No of Shares

Value of ex-right share price = $ 35,50,000 / 12,50,000

Value of ex-right share price = $ 2.84 / Share

b)

There is no change in investment value c-u-m rights

Investment value after ex-rights = $ 2.84 * 12,50,000

Investment value after ex-rights = $ 35,50,000

c)

if Company announced 1 for 2 rights issue with a subscription price of $2.2 per share.

so they will have rights of 5,00,000 shares since they are holding 1 million shares.

if fund manager subscribe for the rights then ,

Total investment in rights = $2.2 / Share * 5,00,000

Total  investment in rights = $11,00,000

Investment Value after ex-rights = $ 30,00,000 + $ 11,00,000

Investment Value after ex-rights = $ 41,00,000 or $ 4.1 mn