Question

“Romani Limited has a current share price of $7.60. The company has made a renounceable rights issue offer to shareholders. The offer is a three –for-ten pro-rata issue of ordinary shares at $7.45 per share.

(a) Explain the effect of the offer being renounceable

(b) What is the price of each right?

(c) Calculate the theoretical ex-rights share price.

Answer 1

(a) It's a right issue that means shares will be issued only to existing shareholders. The offer being renounceable means, the rights will be listed on the stock exchange and the existing shareholders can sell the rights to others in lieu of accepting the offer.

(b) Price of a right = R = n x (P - S) / (n + 1) where

n = number of rights per share = 3/10 = 0.3

P = Current share price = $ 7.60

S = Rights issue price = $ 7.45

Hence, Price of each right = R = 0.3 x (7.60 - 7.45) / (0.3 + 1) = $ 0.03462

(c) Theoretical ex-rights share price = P - R = 7.60 - 0.03462 = $ 7.5654