Question

Scotch Spirit currently has 60 million shares of stock outstanding at a price of $40 per share. The company would like to raise money and has announced a rights issue. Every existing shareholder will be sent one right per share of stock that he or she owns. They plan to require 3 rights and $30 to purchase one new share.

1. Assuming the rights issue is fully subscribed, how much money will it raise?
2. What will the share price be after the rights issue?
3. How much is each right worth?

Answer 1

The money required to be raised is calulated by (outstanding stock/No.of rights )* cost of one share

= ($60million/5)*30 = $360 million

The price of share after the issue will be = Value of the equity after the issue / number of shares after the issue.

Total shares= New shares + old shares

                  =(60million/5) + 60million = 80million.

MArket value of equity but present it is not being traded so we call it as current value of equity = 60million * $30 =$1800 million.

Therefore, Total share price after the issue is 1800/80= $22.5

THe each right worth is calculated by ( market value- subscription price)/(no.of rights +1)

= (40-30)/(5+1) =$1.66

Hence, each share is worth of $1.667