Question

An investor has 4 shares with a current price of € 40 and cash € 60. The company makes a share capital increase with terms 2/4 and price 10 €. Find:
a. The price of the right and the value of the investor's portfolio.
b. If the investor decides to participate with rights, what is the value of the portfolio?
c. If he sells the rights and holds the shares and cash, what is the value of the portfolio?
d. If he sells the shares and the rights, what is the value of the portfolio?

Answer 1

a. Value of investor's portfolio = value of shares + Cash = 4*40 + 60 = €220.

Price of the right = No. of shares offered* Price of one share= 4*2/4 *10 = €20

b. If the investor decides to participate in the right,

Cash left with the investor = 60-20 = €40

Value of the shares= 40*6 = €240

Therefore, the value of his portfolio = €280

c. Value of his rights sold = 4*2/4*10= €20

Value of his portfolio = Value of shares + Cash intially held + Cash from his rights = 160 + 60 + 20= €240

d. Value of his shares and rights sold= 160 + 20 = €180

Amount of cash with the investor = €60

Therefore, the value of his portfolio= €180+ €60 = €240