Homework Answers
| Investment required | $ 5,000,000 | ||||||||
| Subscription price | $ 50 | ||||||||
| New shares issued | 100,000 | ||||||||
| Existing no of shares | 500,000 | ||||||||
| No of rights required for 1 share | 500000/100000 | ||||||||
| No of rights required for 1 share | 5.00 | ||||||||
| Share price before right issue | $ 68.00 | ||||||||
| Rights required for new share | 5 | ||||||||
| Subscription price | $ 50.00 | ||||||||
| 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= | '((68*5)+50)/(5+1) | ||||||||
| Share price after right issue= | $ 65.00 | ||||||||
| Value of 1 right | '(68-65) | ||||||||
| Value of 1 right | $ 3.00 | ||||||||
| Value of 1 right to acquire 1 share | '5*3 | 15.00 | |||||||
| Shares already held- 500000*2% | 10,000.00 | ||||||||
| Stock Valuation before right | '10000*68 | $680,000 | |||||||
| There will be no impact if shareholder either exercise his right or sell his rights | |||||||||
| If Rights are used to purchase additional share | |||||||||
| Old share | 10,000 | ||||||||
| Right shares- 10000/5 | 2,000 | ||||||||
| Total Share | 12,000 | ||||||||
| Share price after right issue | 65.00 | ||||||||
| Total Wealth | 780,000 | ||||||||
| Less value paid for right shares-2000*50 | $ (100,000) | ||||||||
| Effective wealth | $ 680,000 | ||||||||
| %age ownership-old | 10000/500000 | 2.00% | |||||||
| %age ownership-new | 12000/600000 | 2.00% | |||||||
| If investor sells the rights then there will be no impact on his wealth however since purchaser of right will be purchasing | |||||||||
| the additional shares and hence his shareholding will go down. | |||||||||
| If investor let the right expire, the wealth will be eroded for investor. Also, the comparitive ownership will also go down. | |||||||||
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