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Hi,
Can’t understand following question. Please solve.
The finance director of WILL proposes to raise the required £20 million of finance
through a £20m rights issue of new equity.
Two alternative rights issues are under consideration. The first proposal is a rights issue at only a modest discount to the current share price: a 1-for-2 rights issue at 100p per share. The alternative is at a much deeper discount to the current share price: a 1-for-1 rights issue at 50p per share.i) Using as an example an investor who holds 50,000 WILL shares,
demonstrate that neither of the two rights issue proposals will affect shareholder
wealth and nor is shareholder wealth affected by whether or not investors subscribe
to the rights issue.ii) Briefly discuss the issues to be considered when determining the level of a
rights issue share price discount.Please don’t expect questions simply to be solved for you. You must have an answer in the same book in which you found the question, and so you should ask about whichever part of the answer is causing you a problem. (If it was homework and therefore you do not have an answer, then we are certainly not here to do your homework 🙂 )
This is a Paper F9 topic and you can find how to answer it by watching our free Paper F9 lecture which is one of the lectures that go with Chapter 11 of our free lecture notes.
Hi John,
Thanks for clearing it out, not a homework.Found this Q in senior’s book.
My solution :
proposal 1 p proposal 2 p
2 shares at 112p 224 1 share at 112p 112
1 shares at 100p 100 1 share at 50p 50
value of 3 shares 324 value of 2 shares 162
Value of 1 share 108 value of a share 81it has fallen after rights issue.current market price is 112p
deficit is 112-108=4PHow will this deficit will be exactly knocked off by the gain is causing me the confusion in both proposals.Forgot to mention that WILL has 40 million shares in issue.
Kinldy help
I have no idea where you got the 112p from.
However although the shareholder makes a loss on their existing shares, they make a gain on the new shares that they bough cheaply.
On proposal 1, they are currently worth 50,000 x 1.12 = 56,000
After the rights issue their shares are worth 75,000 x 1.08 = 81,000, but they had to pay out 25,000 x 1.00 = 25,000 to take up the rights. So the net affect is that they are still worth 81,000 – 25,000 = 56,000.
Again, you should watch the free lectures on this. I cannot type out the whole of the lectures here.
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