Rights4U is a manufacture that trades on the Hong Kong Stock Exchange. It is
thinking of making a rights issue to raise $400 million. The current price of its
stock is $35 per share. Rights4U has 80 million shares outstanding. The issue
price will be $25 per share.
(a) How many shares should Rights4U issue?
(b) How many rights will be required to buy one share at the issue price
assuming one right is issued for each of the initial 80 million shares?
(c) What is the ex-rights price of the stock assuming all rights are exercised
and the total value of the firm rises by the amount of new funds raised?
(d) How would your answer to (c) be changed if only 90 percent of the rights
are exercised?
(e) Suppose that the firm anticipates that only 90 percent of the rights issued
will be exercised and adjusts the number of shares that it announces will be
made available for sale at the issue price so that the issue will succeed in
raising $400 million. What will be the ex-rights price in this case?