Chambers Industries has a market capitalization of $800 million and 250 million shares outstanding.The management of this firm plans to raise further capital through a rights issue.Which of the following rights schemes will raise the most money,if all shareholders exercise their rights?

Question

Quizplus · Accepted Answer

To determine which of the rights schemes will raise the most money, we need to calculate the total amount of money that can be raised by each option.

Option A: 
Price per share = $1.60 
Number of shares per right = 1 
Number of rights needed to purchase one share = 2 
Total cost per share = $3.20 
Total cost for all shares = $800 million 
Total number of shares = 250 million 
Number of new shares issued = 125 million 
Total money raised = 125 million x $3.20 = $400 million

Option B: 
Price per share = $1.80 
Number of shares per right = 2/3 
Number of rights needed to purchase one share = 3/2 
Total cost per share = $1.80 x (3/2) / (2/3) = $2.70 
Total cost for all shares = $800 million 
Total number of shares = 250 million 
Number of new shares issued = 125 million 
Total money raised = 125 million x $2.70 = $337.5 million

Option C: 
Price per share = $2.00 
Number of shares per right = 3/4 
Number of rights needed to purchase one share = 4/3 
Total cost per share = $2.00 x (4/3) / (3/4) = $2.67 
Total cost for all shares = $800 million 
Total number of shares = 250 million 
Number of new shares issued = 125 million 
Total money raised = 125 million x $2.67 = $333.75 million

Option D: 
Price per share = $1.50 
Number of shares per right = 2/5 
Number of rights needed to purchase one share = 5/2 
Total cost per share = $1.50 x (5/2) / (2/5) = $3.75 
Total cost for all shares = $800 million 
Total number of shares = 250 million 
Number of new shares issued = 125 million 
Total money raised = 125 million x $3.75 = $468.75 million

Option E: 
Price per share = $1.00 
Number of shares per right = 2/10 
Number of rights needed to purchase one share = 10/2 
Total cost per share = $1.00 x (10/2) / (2/10) = $5.00 
Total cost for all shares = $800 million 
Total number of shares = 250 million 
Number of new shares issued = 125 million 
Total money raised = 125 million x $5 = $625 million

Based on the calculations, option C will raise the most money with a total of $333.75 million.

Chambers Industries Has a Market Capitalization of $800 Million and 250