st in a major new development that will cost € 40 million, and is now considering ways to finance the investment. Various alternatives have been considered but the choice has been narrowed down to a rights issue or the issue of debentures (a kind of bond). The rights issue would be made at a discount of 20% and be underwritten at a cost of 2% of the proceeds. The company’s chairman has discussed the proposed investment and its prospects as well as the financing possibilities, quite openly with various institutions and the financial press. As a result it is likely that the share price already reflects the implications of the
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Santa PLC is an all equity financed company with 100 million shares outstanding trading at €2 per share. Its management has decided to invest in a major new development that will cost € 40 million, and is now considering ways to finance the investment. Various alternatives have been considered but the choice has been narrowed down to a rights issue or the issue of debentures (a kind of bond).
The rights issue would be made at a discount of 20% and be underwritten at a cost of 2% of the proceeds. The company’s chairman has discussed the proposed investment and its prospects as well as the financing possibilities, quite openly with various institutions and the financial press. As a result it is likely that the share price already reflects the implications of the company’s proposed investment.
a) Determine the terms of the right issue, the ex-rights price and the theoretical value of the right.
b) Explain and assess the view that rights issues are designed to protect the interests of shareholders.
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