Question

If a company wishes to raise R2 million through a rights issue at a subscription price of R100 each, while its 20 000 outstanding shares trade at R 150 apiece, what would the theoretical value of its shares after issue be?

Answer 1

Before issue ;the company had 20,000 outstanding shares trading at R150 per share.

The company wants to raise R 2 million through a rights issue at a subscription price of R 100 each hence the number of rights is $\frac{2,000,000} {100}$ =20,000 shares.

Thus the theoretical value(after issue) =

$\frac{Market value of shares prior to rights issue +Cash raised from rights issue} {Number of shares after rights issue}$

$\frac{(20,000 ×150) +2,000,000} {20,000+20,000}$ =$\frac{5,000,000}{40,000}$ =125

=R125