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Calculation of  Theoretical Ex-rights Price per Share of a Company

Question

Nike Ltd has issued share capital 4 million ordinary shares, with a par value of $1 each share. The board of the company has accepted the proposal for a new venture and therefore needs to raise $2 million.

The finance director has suggested that this finance be raised by way of a 1 for 4 rights issue which will be priced at a 30$ discount to the current market price of $3 per share.

  • Calculate the theoretical ex-rights price per share
  • Calculate the cash raised
  • Calculate the value of the rights

The finance director also recommended having the rights issue underwritten by an investment ban or relevant finance house at the time of issues.

  • Explain underwriting and consider whether underwriting is a valid expense at this time
  • An investment bank sponsoring an issue will usually charge a fee of between 2-4% of the issue proceeds and then pays part that fee, 1.25-3% of the issue proceeds, to sub underwriters.
  • Explain why, in general, rights issues are priced at a discount to the prevailing market price of the shares
  • Calculate and discuss the factors that determine whether the actual ex-rights share price is the same as the theoretical ex-rights share price.

 

Summary: This question belongs to finance and discusses about discusses about a company’s theoretical ex-rights price per share to raise capital.

Answer is in Excel format

 

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Comments

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