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Hello sir im having a problem with this question. Please help.
Question : Drumlin vo has $5m of $0.50 nominal value ordinary shares in issue. It recently announced a 1for 4 RI at $6 per share. Its share price on the announcement of the RI was $8 per share. What is the theoretical value of a right per existing share?
Answer : value of right = 5m *8 +1.25*6 divided by 6.25m – $6 divided by 4 =0.40
Can you explain the answer please
There are currently $5M/0.5 = 10M shares in issue, and therefore they are issuing 2.5M new shares.
So the TERP is ((10M x $8) + (2.5M x $6)) / 12.5M = $7.60.
Therefore the value of the rights is 7.60 – 6.00 = $1.60 per each new share.
It needs 4 existing shares to get the right to 1 new share and therefore the value of the rights is $1.60/4 = $0.40 per existing share.
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