Question

At the beginning of the current reporting period (1 July 2019 – 30 June 2020) Winterhall Ltd has 600,000 ordinary shares on issue. The company announced a one for three (one share for every three shares held) rights issue on 31 December 2019. The exercise price is $3.70 and the last date to exercise the rights is 1 March 2020. The market price of one share immediately before exercise on 1 March 2020 was $4.70.

Required:Determine the theoretical ex-rights value per share (keep two decimal places and show all your workings).

Answer 1

Answer:

Theoretical Ex-right price

= (Market capital before right issue + Proceeds from right issue) ÷ Total number of shares after right issue

= ($2,820,000+$740,000) ÷ 800,000 shares

= $3,560,000 ÷ 800,000 shares

=$4.45

Calculations:

• Market capital before right issue = 600,000 ordinary shares x $4.70 fair value of the share = $2,820,000
• Number of right shares (1:3) = 600,000/3 = 200,000
• Proceeds from right issue = 200,000 right shares x $3.70 exercise price = $740,000
• Total number of shares after right issue = 600,000 ordinary shares + 200,000 right issue shares = 800,0000 shares