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Unit 3: Reissue of Forfeited Shares and Bonus Issue

Share price after issue $218,000,000/5,500,000 = $39.64 Notes
(c) Loss per share to existing holders = $40 - $39.64 = $0.36
(d) Percentage reduction in value = ($0.36/$40) 100 percent = 0.90 percent
(e) NPV purchasing shares via offer = $39.64 – $36 = $3.64

(b) (a) Value of equity before issue = 5,000,000 $40 = $200,000,000
(b) Increase in value = $18 m/$200 m 100 percent = 9%
(c) Value of right = (rights-on price - issue price)/(N+ 1) = ($40 – $36)/11 = $0.36
(d) Ex-rights price = (rights-on price - value of right) = $40 – $0.36 = $39.64

2. Jackrabbits Corporation is making a right issue to raise $6 million. Just before the issue,
Jackrabbits’ stock price was $20, and the terms of the issue are 1 for 4 at a subscription price
of $15.
Calculate (a) the expected price of the stock ex-rights and (b) The value of one right.
(c) Baby Rabbit owns 20,000 shares. How many rights will he have to sell to maintain the
same ($400,000) investment in the company? (d) Show that in general, the value of a right
is given by the formula (rights-on price - issue price)/ (N + I) when the terms of the issue
are 1 for N.
Solution:
(a) After the issue is completed, all shares will be ex-rights. For every 4 shares worth $20
before the issue, there will be 5 shares worth $20 x 4 + $15 (= $95) after the issue. Each share
will, therefore, be worth $95/5, so the ex-rights price is $19.

(b) The value of one right is the difference between the rights-on price (the share price before
the issue) and the ex-rights price. This is $1.
(c) Baby Rabbit will get 5,000 rights and if he were to keep all his rights, he would end up with
25,000 shares valued at a total of 25,000 $19 = $475,000. In order to retain his original
investment, he should have $400,000/$19 = 21,053 shares. Therefore, he needs to keep only
1,053 rights and sell the remaining 3,947 rights. This will give him $3,947.
(d) N shares at the rights-on price gets an additional share subscribed to at the offer price. This
gives the basic equation:
N (rights-on price) + issue price = (N + 1)(ex-rights price)
Alternatively, this can be written as:
[(N + 1) rights-on price] – (rights-on price - issue price) = (N + 1) ex-rights price

Value of a right = right-on price – ex-rights prices = rights-on price – issue price/(N + 1)

3.5 Bonus Issue of Shares

Introduction
“Capitalisation of profits refers to the process of converting profits or reserves into paid up
capital.” A company may capitalise its profits or reserves which otherwise are available for
distribution as dividends among the members by: (a) paying up amount unpaid on existing
partly paid shares so as to make them fully paid shares, or (b) issuing fully paid bonus shares to
the members. The Companies Act does not contain any specific provision regarding capitalisation
of profits and consequently issue of bonus shares. However, the Companies Act permits that the

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