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Hello,
I don’t know how to do the following question
The share price of a company is $4 per share. They announce a rights issue at 3.1 per share. What % of rights offered to a shareholder does he need to take up so as to have no net cash flow resulting from the issue?
How would you go about answering this?
Thank you
You really should watch the free lectures – they go through the whole syllabus for F9 and the lecture on rights issues goes through an almost identical example to the one above!
You have missed out part of the question – it says that it is a 1 for 5 rights issue.
The ex-rights price is therefore ((5 x $4) + $3.10) / 6 = $3.85 per share.
Suppose someone currently owns 10000 shares (any number will do – 10000 is easy!)
They are currently worth 10,000 x $4 = $40,000
After 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
ok I understand that now- thanks 🙂 I have watched almost all the lectures actually, I find them very helpful (this is an especially confusing topic for me!)
thank you
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