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Serbanika Limited has issued share capital of 2 million common shares, par value $1.00. The board of the company has decided it needs to raise $1million, net of issue costs, to finance a new product. It has been suggested that the additional finance be raised by means of a 1-for-4 rights issue. The issue price will be at a 20% discount to the current market price of $2.75 per share and issue costs are expected to be $50 000. Calculate and explain the following:

Serbanika Limited has issued share capital of 2 million common shares, par value $1.00. The board of the company has decided it needs to raise $1million, net of issue costs, to finance a new product. It has been suggested that the additional finance be raised by means of a 1-for-4 rights issue. The issue price will be at a 20% discount to the current market price of $2.75 per share and issue costs are expected to be $50 000. Calculate and explain the following:

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Serbanika Limited has issued share capital of 2 million common shares, par value $1.00. The board of the company has decided it needs to raise $1million, net of issue costs, to finance a new product. It has been suggested that the additional finance be raised by means of a 1-for-4 rights issue. The issue price will be at a 20% discount to the current market price of $2.75 per share and issue costs are expected to be $50 000. Calculate and explain the following: (i) The theoretical ex-rights price per share; (ii) The net cash raised; (iii) The value of the rights. (iv) Explain the advantages and disadvantages of using rights as a financing method for corporations.
Transcribed Image Text:Serbanika Limited has issued share capital of 2 million common shares, par value $1.00. The board of the company has decided it needs to raise $1million, net of issue costs, to finance a new product. It has been suggested that the additional finance be raised by means of a 1-for-4 rights issue. The issue price will be at a 20% discount to the current market price of $2.75 per share and issue costs are expected to be $50 000. Calculate and explain the following: (i) The theoretical ex-rights price per share; (ii) The net cash raised; (iii) The value of the rights. (iv) Explain the advantages and disadvantages of using rights as a financing method for corporations.
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