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Sources of finance

Question 5

Shareholder’s options

Hicks Co, which has an issued share capital of 5 million shares each priced at
$10.50, makes a rights issue of one new share for every 4 currently in issue.
The issue price is $9.50, the TERP is $10.30 and the value of a right is $0.80.

Calculate the effect on the wealth of a shareholder who initially held 15,000
shares in Hicks Co if they:

(i) Take up their rights

(ii) Sell the rights

(iii) Do nothing

Shareholder wealth pre rights issue: 15,000 × $10.50 = $157,500

(i) Take up rights

Pays for (15,000/4 × 1) 3,750 new shares at $9.50 each = $(35,625)

Now has 18,750 shares each worth $10.30 each = $193,125

Net wealth = $193,125 – $35,625 = $157,500

(ii) Sell the rights

Sells rights to 3,750 shares at $0.80 each = $3,000

Now has 15,000 shares worth $10.30 each = $154,500

Net wealth = $154,500 + $3,000 = $157,500

(iii) Do nothing

Has 15,000 shares worth $10.30 each = $154,500

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