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Rights issue: subscription price

If a company is considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of $3, would a shareholder with 100 shares be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6. Please prove your analyze with a given formula and the figures shown.

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If a  company is considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of $3, would a shareholder with 100 shares be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6. Please prove your analyze with a given formula and the figures shown.

Let the sahre price before the issue of rights issue be $10.00

Case 1
purchasing a new share for 10 rights at $3.00
No of shares held= 100
Mkt value of these shares= $1,000 =100*$10.
No of rights required ...

Solution Summary

The solution calculates the point of indifference between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6.

$2.19