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Business valuations and market efficiency

Question 3

Value of a right

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 and the TERP is $10.30.

Calculate the value of a right and the value of a right per existing share.

Value of a right = $10.30 – $9.50 = $0.80.

Value of a right per existing share = $0.80/(4/1) = $0.20

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