Antonis has € 9000 to invest in shares. Observes the share of the ABC company. ABC...

Antonis has € 9000 to invest in shares. Observes the share of the ABC company. ABC has decided to increase its share capital with preference rights. The terms are 1 new share for every 6 old shares with a selling price of € 51 per share. The share price of the ABC company is € 60 (without the right to participate in the share capital increase). Calculate:
a) How many rights can Antonis buy with € 9000? How many shares of the ABC business can he buy with the € 9000?
b) If Antonis invests € 9000 in the rights of the ABC company and the share price increases to € 72 per share (without the right), how many euros will he win?
c) If Antonis invests € 9000 in shares of ABC and the share price increases to € 72 per share (without the right), how many euros will he win?
d) What will be the answer to question b) if the share price of ABC is reduced to € 45 per share (without the right) instead of being increased to 72?
e) What will be the answer to question c) if the share price of the ABC company is reduced to € 45 per share (without the right)?

Solutions

Expert Solution

Following information is given in the question

1. Antonis has € 9,000 to invest in shares.

2. Terms of preference right (A rights issue is the offer to new issue of shares by the company to the existing shareholders at first. This is done to raise capital/funds for the company. When the existing shareholder renounce the right, these can be offered to outsiders):

No. of shares = 1 new share for 6 old shares

Selling Price = € 51 per share

3. Share price of ABC company = € 60 per share

Answers:

a) How many rights can Antonis buy with € 9000? How many shares of the ABC business can he buy with the € 9000?

Selling price of one right is € 51. Thus, with € 9,000, Antonis can buy €9,000/€51 = 176.47 or 176 rights (rounded off to lower number as shares cannot be held in decimals)

Share price of ABC company is €60 per share. Thus, with € 9,000, Antonis can buy €9,000/€60 = 150 shares

b) If Antonis invests € 9000 in the rights of the ABC company and the share price increases to € 72 per share (without the right), how many euros will he win?

Selling price of one right is € 51. Thus, with € 9,000, Antonis can buy €9,000/€51 = 176.47 or 176 rights. If the share price increases to € 72 per share, he will earn €21 per share (€72-€51). For the 176 rights acquired, he will win 176 * €21 = €3,696

c) If Antonis invests € 9000 in shares of ABC and the share price increases to € 72 per share (without the right), how many euros will he win?

Share price of ABC company is €60 per share. Thus, with € 9,000, Antonis can buy €9,000/€60 = 150 shares. If the share price increases to € 72 per share, he will earn €12 per share (€72-€60). For the 150 shares bought, he wiil win 150 * €12 = €1,800

d) What will be the answer to question b) if the share price of ABC is reduced to € 45 per share (without the right) instead of being increased to 72?

Selling price of one right is € 51. Thus, with € 9,000, Antonis can buy €9,000/€51 = 176.47 or 176 rights. If the share price reduces to € 45 per share, he will lose €6 per share (€51-€45). For the 176 rights acquired, he will lose 176 * €6 = €1,056

e) What will be the answer to question c) if the share price of the ABC company is reduced to € 45 per share (without the right)?

Share price of ABC company is €60 per share. Thus, with € 9,000, Antonis can buy €9,000/€60 = 150 shares. If the share price reduces to € 45 per share, he will lose €15 per share (€60-€45). For the 150 shares bought, he wiil lose 150 * €15 = €2,250.

Additional answer

Rights issues comes at a discount of €9 per share (€60 share price - €51 rights price). Antonis can definitely subscribe to rights issue instead of directly buying the share in case if he can get the rights which is renounced by an existing shareholder.

jeff jeffy answered 1 year ago

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