The current share price is $8 per share.
The company makes a rights issue of 1 for 3 at $6 per share.
(a) What is the ex-rights market value?
(b) What is the value of a right?
(c) Mrs X owns 1,200 shares Calculate the effect on her wealth?
A) current price= 3x8=24
Right value =1x6 =6 Ex-value=30/4= 7.5 stock exchange price
B) EX -Value =7.5
Right Value =6 So Value of right(Sale Price)=1.5
C) Mrs X has 3 options either she can reject the offer ,take offer and sale is it ok sir
1) if she reject=
Current wealth = 1200x 8 =9600
at right cost wealth =1200x 6= 7200 so she loss 2400
2) is she accept the offer so cost of takeing
right value =1600x7.5=12000
Take cost 400x6 = 2400 so wealth 9600
3) Sale
400x1.5= 600 so 9600+600=10200 net wealth
is this right sir ?
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FMRight Issue
effect of rights issue on her wealth if
1. she does nothing:
current wealth: 1200*8 = 9600
after rights issue: 1200*7.5(TERP) = 9000
she lost 600 in her wealth
2. she takes the right:
market value of shares 1200*7.5(TERP) = 9000
sale value of right 1200*0.5(being value of right on existing share) = 600
total wealth after right issue = 9600
current wealth 1200*8 = 9600
she is not worse off nor better off
3. she sells her right:
market value of existing share 1200* 7.5 = 9000
proceeds on sale of rights 1200*0.5 = 600
total wealth = 9600
current wealth 1200*8 = 9600
she is not worse off nor better off
PLEASE CHECK THIS TO CONFIRM ITS CORRECT
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