Question

NLT has 2 million shares outstanding and the current share price is $12 per share. The company announced to launch a rights offering where each share is given one right and shareholders can purchase one share at $10/share for every 4 rights. Assuming all shareholders will participate, the total equity value of NLT post rights issue is closest to

Select one:

a. $20m

b. $23m

c. $32m

d. $24m

e. $29m

Answer 1

Company has 2m shares outstanding at $12 per share

Equity value before right issue = shares* price per share

Equity value = 2m*$12

Equity value = 24m

In right issue, new shares will be issued in which ratio is 1:4, it means shareholder can get one share for 4 shares

Total number of new shares issued = Shares outstanding/4 = 2,000,000/4 = 500,000 shares

Value of 500,000 shares at issue rate which is $10

Total value of new shares: 500,000*10 = 5,000,000

Value of total shares = 24,000,000+5,000,000 = 29,000,000

Answer is option e = $29m