A company with 20 million shares in issue announces a 2 for 5 rights issue at a price of GH¢3 per share. The market price of the existing shares before the rights issue is GH¢3.70.
Required:
i) What is the theoretical ex-right price? (3 marks)
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ii) What is the theoretical value of the rights? (3 marks)
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In theory, the holder of five shares in the company in the previous example could buy two new shares in the rights issue for GH¢3 each, and these two shares will be expected to rise in value to GH¢3.50, a gain of GH¢0.50 for each new share or GH¢1.00 in total for the five existing shares.
We can therefore say that the theoretical value of the rights is:
GH¢0.50 for each new share issued, or
GH¢0.20 (GH¢1.00/5 shares) for each current share held.