Rights Issue

Avilas Ltd is about to make a 1 for 3 rights issue. Its existing equity and debt in its capital structure is as follows:

6 million ordinary shares of sh 1 6,000,000
15% Debenture (redeemable at par in 10 years) 6,000,000
15% Bank loan (Repayable after 10 years) 6,000,000

The money raised from the rights issue would be used to do two things:

1. Buy back all the 15% debentures at their current market value. It is expected that their market value will be price to offer investors a yield of 9% on their investment since market interest rates have fallen substantially since the debenture were issued some years ago. (9% is the current market yield on debentures and bank loans with 10 years remaining to maturity).
2. Finance a new project costing Sh 1.6 million. The profitability index of this project is 1.8. The company’s intention to undertake this project and its expected profitability have been made known to the investing public for some time.

The total finance required for (a) and (b) should be rounded up to the nearest Sh 100,000 for the purpose of rights issue.

The rights issue has not been formally announced. The announcement of the issue will take place on March 15th and the market value share is then expected to be Sh 6.20.

Required:

(a) Calculate the issue price per share
(b) The theoretical ex-rights price
(c) The value of the right attached to each share before being traded ex-right