Calculating the value of a right

[daveco]

Quick questions chaps as I struggle my way through past exam papers...

"The New Word Corporation has 1,000,000 shares outstanding at €30/share. If the firm wishes to raise €13.5 million at a subscription price of €27/share, calculate the value of a right"

My answer;
(Stock Price - Rights subscription price per share) / # of rights required to buy one share + 1
= €30 - €27/1+1 = €1.50

Is it that simple??

[walm]

It's the difference between the TERP and the rights subscription price.

Firstly - how many shares are going to be issued?
E13.5m divided by E27 = 500,000.

So after the rights issue you have - the company you started with PLUS the cash raised.
So the new market cap should be the old market cap plus the cash raised.
= E30 times 1m shares plus E13.5m = E43.5m

But what is the new share count? Well the old share count plus the new shares issued, so 1.5m shares out.
So the TERP is the new market cap divided by the new share count...
E43.5m divided by 1.5m = E29

So what does a right get you?
Well for one right, you can buy something for E27, that is worth E29 (in theory!).

So the right is worth E2.

Please note - I am as rusty as a barn find made by Peugeot.

[walm]

Or - if you don't have to show working:

(current price - subscription price) times by (old share count/new share count)

So here (E30-E27) times by (1m/1.5m) = E3 * 2/3 = E2

[daveco]

Walm as always you have been a great help! Cheers old bean

[walm]

Pleasure - I just hope I am correct!