Determine the theoretical ex-rights price

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Reference no: EM13688102

General Electronics plc's shares have recently been trading around the £5.00 mark over the last few days. This is close to the highest price recorded for the company's shares, and reflects the market's view that the company has considerable potential for profitable growth.

The company has 100 million shares outstanding and overall value of the company's shares is £500 million. The company has relied heavily in the past on retentions to finance its investments but it now finds that some of its growth will have to be funded externally. The market has been anticipating an announcement of an issue of shares.

On this basis the company is to undertake a rights issue to raise £240 million to fund a major investment programme to extend the company's activities in new markets. It is proposed to issue shares at a discount of twenty five per cent, and to have the issue underwritten. The possibility of a deep discount issue with the new shares being offered at £3.00 per share was also considered. However, the company's investment bank advised against this, and recommended an underwritten issue at a discount of 25 per cent and the company has accepted this advice.

a) Specify the terms of the planned issue, determine the theoretical ex-rights price and the expected value of a right.

b) Demonstrate that in principle a shareholder holding 100 shares will be equally well off by subscribing to the shares or by selling her rights.

Reference no: EM13688102

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