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.The number of outstanding shares in Pickle Ltd is 5000.Calculate the value of Dill's investment ex-rights.
A)$537.50
B)$645.00
C)$550.00
D)$615.00

Question

Quizplus · Accepted Answer

Dill owns 5% of 5000 shares, which is 250 shares. The rights issue allows Dill to buy 1 new share for every 5 shares owned, so Dill can buy 50 new shares at $1.90 each. The ex-rights price is calculated as [(250 shares * $2.20) + (50 shares * $1.90)] / 300 shares = $2.10. Dill's investment ex-rights is 300 shares * $2.10 = $630.00. However, the correct calculation should be based on the value of Dill's original shares ex-rights: 250 shares * $2.20 = $550.00.

Dill Owns Five Per Cent of the Outstanding Shares in Pickle