Business Z has 25 million shares outstanding at $13 Wishes to Raise $5 Mill for Investment Announce 1 for 10 rights issue -> Subscription price of $3 per share Find share price of Business Z, when it trades ex-rights
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Business Z has 25 million shares outstanding at $13
Wishes to Raise $5 Mill for Investment
Announce 1 for 10 rights issue -> Subscription price of $3 per share
Find share price of Business Z, when it trades ex-rights
Theoretical Ex Right Price:
The projected value of a company's share following a rights issue is known as the theoretical ex-rights price (TERP).This condition involves the separation of the stock from the related right. The weighted average price per share of the existing and new shares is typically used as a proxy for this estimation.
A rights issue is when a firm issues new shares to its existing shareholders in exchange for cash. The price at which right shares are issued is slightly less than the current share market price.
Step by step
Solved in 2 steps
