Question

The b3 Milk Company Limited is looking to expand and is contemplating a renounceable rights issue. There are currently 2 million shares outstanding with a market value of $60 each. b3 Milk needs to raise $24 million and wants you to design a rights issue that will allow the new share price to be no lower than $55 and for there to be no more than 2.5 million shares outstanding after the issue. Calculate: a. how many shares must be held to obtain the right to one new share b. the theoretical ex-rights price of the new share? c. The value of each right

Answer 1

Right issue of shares = 2.5 - 2 = 0.5 million shares

a.

how many shares must be held to obtain the right to one new share = new right shares / existing no of shares = 0.5/2 =0.25

ie 1 right share for every 4 shares

b.

The exright price = Total value of the shares after the right issue / total no of shares after the right issue

= (2*60 + 0.5*55)/ 2.5

= 59

c.

Value of right = ( Price per share before right - subscription price ) / ( no of shares for every right + 1 )

= ( 60 - 55) / ( 4+1)

= 1