Question

3.      QRS N-Queries Company has an exciting new project that will cost $10,000,000. The company proposes to finance this project by issuing new shares with a rights offering. Currently, the company has 2,000,000 shares outstanding, each valued in the financial market at $30. With the rights offering, shareholders will be able to purchase one new share for a subscription price of $10.                                                                                        (6 marks)        

1. What is the rights-on price for each share, M₀?                          (1 mark)
2. How many new shares will be issued?                                       (1 mark)
3. How many rights will be required to buy one new share, N?          (1 mark)
4. What is the value of a right before the ex-rights date, R₀?          (1 mark)
5. What is the ex-rights price for each share, M_e?                          (1 mark)
6. What is the value of a right after the ex-rights date, R_e?             (1 mark)

Answer 1

	Share price before right issue	30
	Total funds required	$      10,000,000
	Subscription price per share	$                    10
	No of right shares	Total funds/Subscription price
	No of right shares	10000000/10
	No of right shares	1,000,000
	Existing no of shares	2,000,000
	Rights required for 1 new share	2000000/1000000
	Rights required for 1 new share	2
	Rights required for new share	2
	Subscription price	10
	Share price after right issue=	(Before right price * Shares required for right share + New subscription price)/Old share + Right share
	Share price after right issue=	'((30*2)+10)/(2+1)
	Share price after right issue=	23.33
	Value of 1 right	'(30-23.33)
	Value of 1 right	6.67
	Value of 1 right to acquire 1 share	'2*6.67	13.33