1. Hanging Valley plc has issued share capital of 2 million ordinary shares, par value £1.00. The board of the company has decided it needs to raise £1m, net of issue costs, to finance a new product.
(a) It has been suggested that the additional finance be raised by means of a 1 for 4 rights issue. The issue price will be at a 20 per cent discount to the current market price of £2.75 and issue costs are expected to be £50 000. Calculate and explain the following:
(i) the theoretical ex-rights price per share;
(ii) the net cash raised;
(iii) the value of the rights.
(b) Is the underwriting of rights issues an unnecessary expense?
2. Brag plc is raising finance through a rights issue and the current ex-dividend market price of its shares is £3.00. The rights issue is on a 1 for 6 basis and the new shares will be offered at a 20 per cent discount to the current market price.
(a) Discuss the relative merits of the following ways of raising new equity finance:
(i) a placing;
(ii) a public offer.
(b) Explain why, in general, rights issues are priced at a discount to the prevailing market price of the share.
(c) Calculate the theoretical ex-rights share price of Brag plc and the value of the rights per share using the above information.
(d) Discuss the factors that determine whether the actual ex-rights share price is the same as the theoretical ex-rights price.