Victoria and Vine VV has 1 million shares outstanding sellin

Victoria and Vine (V&V) has 1 million shares outstanding, selling at $20/share. To finance the expansion of their winery business V&V is planning a rights offering, allowing one new share to be purchased for each 10 shares currently held. The purchase price (subscription price) will be $14.50 a share.

a)How many shares will be issued? (1 Mark)

b)How much money will be raised? (1 mark)

c)What will the stock price be after rights issue (ex-rights)? (2 marks)

d)What action(s) would you have to take in the rights offering if you wanted to maintain your ownership? No Calculations required. (1 Mark)

Please show all of your work.

Solution

Facts of the case:

Shares Outstanding = 1000000

Price prior to rights issue = $20/share

Rights Offering = 1 share for every 10 shares held

Subscription price = $14.50

a] Shares to be issued = Shares Outstanding / Rights offering

= 1000000/10 = 100000 shares

b] Money will be raised =Rights shares*Subscription price

= 100000*14.50 = 1450000

c] Stock price be after rights issue (ex-rights) = [Shares outstanding prior to right issue * Price per share prior to rights issue] + [Number of rights share * Subscription price] / [Shares outstanding prior to right issue + Number of rights share]

Shares outstanding prior to right issue = 1000000

Price per share prior to rights issue =20

Number of rights share =100000

Subscription price =14.5

Stock price be after rights issue (ex-rights) = [1000000*20] + [100000*14.50]/1000000+100000

=20000000+1450000/1100000 = 21450000/1100000 =$19.50 / share

d] Action we have to take in the rights offering if we want to maintain our ownership is:

     Exercise the rights option or

      Renounce the right to another person for a price