(a) Determine how many new shares need to issue and the theoretical ex-rights price. (b) Calculate the value of rights per existing share and the effect on the wealth of a person who owns 200 shares in Venture plc before the rights issue, in each case where the shareholder takes up the rights, sells the rights and does nothing. (c) Discuss why companies make rights issues of equity, rather than raising the equity in some other way.
Venture plc has issues ordinary shares of 20 million £1.00 shares. On 7th June, the Stock Exchange closing price of the shares was £12.00. Early on the morning of 8th June, the business publicly announced that its plan to acquire another business. On 9th June, the business announced its intention to raise the necessary money to finance the acquisition, totaling £100 million, through a rights issue priced at £8.00 per share.
Required:
(a) Determine how many new shares need to issue and the theoretical ex-rights price.
(b) Calculate the value of rights per existing share and the effect on the wealth of a person who owns 200 shares in Venture plc before the rights issue, in each case where the shareholder takes up the rights, sells the rights and does nothing.
(c) Discuss why companies make rights issues of equity, rather than raising the equity in some other way.
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