A company wants to raise $6M using a Rights Issue.

- Shares are currently trading at $6

- Subscription Price is $3

How many shares will be issued ?

Question

A company wants to raise $6M using a Rights Issue.

- Shares are currently trading at $6

- Subscription Price is $3

How many shares will be issued ?

BlackTom AI · Accepted Answer

We start by restating the scenario: the company aims to raise 6 million dollars through a Rights Issue, with the current share price at 6 and the subscription price set at 3.

Key principle: the number of new shares to be issued in a rights issue is determined by dividing the total amount to be raised by the subscription price per new share. This is because each new share will be purchased at the subscription price, and the total proceeds are the product of the number of new shares and that price.

Step 1: Identify the target raise amount = 6,000,000.
Step 2: Identify the price paid by investors for each new share under the rights issue = 3.
Step 3: Compute the number of new shares = total raise / subscription price = 6,000,000 / 3.
Step 4: Perform the division: 6,000,000 ÷ 3 = 2,000,000.

Optional considerations to enrich understanding (not changing the arithmetic):
- The pre-rights trading price (6) helps illustrate why the subscription price (3) is attractive, but it does not change the arithmetic required to determine the number of new shares.
- In a real rights issue, existing shareholders may be offered rights proportional to their holdings; exercising those rights increases total capital raised as per the subscription price, but the calculation of the number of new shares remains based on the amount to be raised divided by the subscription price.
- If the company intended to raise exactly 6 million regardless of share price movements, the structure would be designed to ensure the subscription price and the number of shares align to hit that target; otherwise, adjustments to either parameter would be needed.

BFIN011 Week 7: Practice Quiz

A company wants to raise $6M using a Rights Issue. - Shares are currently trading at $6 - Subscription Price is $3 How many shares will be issued ?

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