Question

Popular Delusions, Inc. is proposing a rights offering. There are 100,000 shares outstanding trading at $24 each.There will be 10,000 new shares issued at a $22subscription price. What is the new market value of the firm?

Answer 1

Answer:

Market Value =$2,620,000

Explanation:

A right issue is the offer of new shares to existing shareholders at a price lower than the current market price. This new shares are issued to each existing shareholders in  proportion of their existing shareholding. This proportion is referred to as the terms of the right issue.

The terms of rights in the question = 10,000 units new shares for 100,000 units existing shares= 1 ratio 10 i.e 1:10

The new market value of the firm would be

unit price(after issue) × Number of shares after issue

Unit price after issue is the weighed average value of the existing shares and   right shares

Unit price =  (10×24)+(1×22)/(10+1)= 23.818

Total number of shares = 100,000+ 10,000= 110,000

Market Value of the firm = 110,000×23.82=2,620,000

Market Value =$2,620,000