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Hi John,
Kindly assist, as usual.The share price is $4.
They announce a 1 for 5 rights at $3.10 per share. What percentage of the rights offered to a shareholder does the shareholder needs to take up as to have no net cash flow resulting from the issue?Thanks.
Ignore the answer above.
First, we need to calculate the ex-rights price.
Now since total shares will be 5+1.
The price will be (5×4/6) + (3.1/6) = $3.85Suppose someone currently owns 10000 shares (any number will do – 10000 is easy!)
They are currently worth 10,000 x $4 = $40,000After the rights issue, they must be worth in total $40,000 and therefore if there is to be no cash effect, their shares must in total be worth $40,000.
Since the new MV is $3.85, it means they must now own 40,000/3.85 = 100390 shares – 390 more than before.
They were entitled to 1/5 x 10,000 = 2,000 shares.
So they must have taken up 390/2,000 = 19.5% of their rights
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