Dill owns five per cent of the outstanding shares in Pickle Ltd,which has just announced a one for five rights issue with a subscription price of $1.90.The current 'cum rights' price for Pickle shares is $2.20.If the number of outstanding shares in Pickle Ltd is 5000,what is the theoretical value of the right to one new share?

Question

Quizplus · Accepted Answer

The theoretical value of the right (TVR) can be calculated using the formula: TVR = (P0 - Pn) / (n + 1), where P0 is the cum rights price, Pn is the subscription price, and n is the number of rights needed to buy a new share. Here, P0 = $2.20, Pn = $1.90, and n = 5. So, TVR = ($2.20 - $1.90) / (5 + 1) = $0.30 / 6 = $0.05. However, this calculation is incorrect based on the initial prompt. The correct calculation should consider the weighted average price of the old and new shares. Correct calculation: [(5 * $2.20) + $1.90] / 6 = $11.90 / 6 = $1.9833. The difference between the cum rights price and the new average price gives the value of the right: $2.20 - $1.9833 = $0.2167, which rounds to approximately $0.22, indicating a mistake in the initial calculation and choices provided. The correct approach to find the theoretical ex-rights price (TERP) is: TERP = [(Old shares * Old price) + (New shares * Subscription price)] / Total shares after the issue. Then, the value of a right = Cum rights price - TERP. Without the correct options matching the recalculated value, the explanation points out the need for reevaluation of the provided choices.

Dill Owns Five Per Cent of the Outstanding Shares in Pickle