Page 77 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes Method of Calculating the Value of Right

Sometimes in the examination, the students are asked to calculate the value of right. The
following procedure is adopted to calculate the value of right:
1. First of all, find out the basis or rate of right issue and then calculate the market value of
shares held by the shareholder. For example, if a company makes a right issue of one share
for every four shares held, a shareholder who wants to take a right share, must hold four
shares. And if the market value of one share of this company is 150, the total market
value of shares will be 4 150 = 600

2. The amount paid to acquire the right share should be added to the total market value of
the shares calculated in (1) for example if the company is issuing one right share for 140,
total value of 5 shares will be = (4150) + (1140) = 740.
3. Calculate the average price of the shares including right share. In the given example:

= 148 per share

4. Deduct the average price of a share from the market value of a share in order to calculate
the value of right in the given example:
Value of right = market value – average price
150 – 148 = 2

3.4 Right Issue

1.(a) ABX Corp. decides to issue the stock via a general cash offer. The board believes it can
raise the $18 million the company requires by issuing shares at $36. The company has 5
million shares outstanding and the current stock price is $40. Ignoring the underwriter’s
spread, calculate the following:
(a) The number of new shares that ABX will have to offer.

(b) The expected price of the shares after the issue.
(c) The loss per share to existing holders.
(d) The percentage reduction in value of an existing stockholder’s investment in the
company
(e) The net present value of purchasing 100 shares via the general cash offer.
(b) ABX is considering the alternative of a privileged subscription stock issue to raise $18
million. The terms of the issue are 1 for 10 at $36, and the corporation’s current stock price
is $40. Calculate the following:
(a) The market value of the corporation’s equity prior to the issue.

(b) The percentage increase in market value due to the issue.
(c) The expected price of one right.
(d) The expected price of the stock ex-rights.
Solution:
1.(a) (a) Number of new shares = $18,000,000/$36 = 500,000 shares

(b) Value of company after issue = $200,000,000 + $18,000,000 = $218,000,000

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