By NEAS - 11/8/2022 12:38:20 PM
CorpFin Mod 14 rights issue practice exam question
● The common stock of a firm is trading at 92 per share.
● A rights issue allows investors to buy one new share at 84 for each 9 shares held.
Assume no other items influence the new stock price except the rights issue.
Question 14.1: Value of shares initially held
What is the value of the nine shares initially held?
Answer 14.1: Each share is worth 92, so the nine shares are worth 9 × 92 = 828.
Question 14.2: Value of new shares (new stock price)
What is the value of each new share after the after the rights are exercised?
Answer 14.2: The ten new shares are worth the original 828 plus the 84 paid in by the investor, so each share is worth (9 × 92 + 84) / 10 = 91.20.
Question 14.3: Value of a right
What is the value of a right to buy one new share?
Answer 14.3: If the investor could not buy a new share at 84, he would have 9 new shares at 91.60 apiece, for a total investment of 9 × 91.60 = 824.40.
With the right to buy a new share at 84, he spends 824.40 + 84 = 908.40 and he has an investment of
10 × 91.60 = 916.00, so the right is worth 916.00 – 908.40 = 7.60.
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