Question

Associated Breweries is planning to market alcohol-free beer. To finance the venture it proposes to make a rights issue at $10 of one new share for each two shares held. (The company currently has outstanding 100,000 shares priced at $40 a share.) Assuming that the new money is invested to earn a fair return, give values for the following:

a) number of new shares,
b) amount of new investment,
c) total value of company after issue,
d) total number of shares after issue,
e) stock price after the issue,
f) the rights issue will give the shareholder the opportunity to buy one new share for less than the market price. What is the value of this opportunity?

Answer 1

A) Number of new shares:

100,000×(1÷2) = 50,000

B) Amount of new investment:

50,000×$10 = $500,000

C) Total value of company after issue:

$500,000+100,000×$40 = $4,500,000

D) Total number of shares after issue:

100,000+50,000 = 150,000

E) Stock price after issue:

$4,500,000÷150,000 = $30

Step-by-step explanation:

Answer 2

Number of new shares:

= 100,000×(1÷2)

= 50,000

Amount of new investment:

= 50,000×$10

= $500,000

Total value of company after issue:

= $500,000+100,000×$40

= $4,500,000

Total number of shares after issue:

= 100,000+50,000

= 150,000

Share price after issue:

= $4,500,000÷150,000

= $30