Lecture 15
Rights Valuation
Topics covered in this lecture
1.
2.
3.
4.
Definition of variables
Formulas
Numerical Example
Practice Question
Variables
•
•
•
•
Funds raised
Dollar or percentage flotation cost
Number of new shares
Number of old shares
•
•
•
•
•
•
Subscription price = S
Number of rights needed to buy one new share = N
Theoretical value of a right = Ro
Rights-on share price = Mo
Ex-rights share price = Me
Ex- rights value of a right = Re
Formulas
Group I - Related to Rights Valuation:
1. Subscription price = S = Funds raised / Number of new shares
2.
Number of rights needed to buy one new share = N = # old shares / # new shares
3.
Value of a right = Ro = (Mo – S) / (N + 1)
4.
Ex-rights share price = Me = Mo – Ro
5.
Ex-rights value of a right = Re = (Me – S) / N
Group II - Related to Flotation Cost:
1. Dollar flotation cost = Funds raised – Net proceeds
2.
Percentage flotation cost = Dollar flotation cost / Funds raised
Numerical Example
On November 1 2011, XYZ Company announced a rights offering to sell 12
million shares at a subscription price of $1.20 per share. The record date
was November 10, 2011. The number of shares outstanding on the record
date was 48 million. The shares of the company were trading at a closing
price of $3.00 per share on November 7, 2011, three business days before
the record date. The net proceeds to the company were $13,392,000.
Calculate the following:
a. Number of rights needed to buy one new share, N
b. Value of a right, Ro
c. Ex-rights share price, Me
d. Ex-rights value of a right, Re
e. Amount of funds raised in the rights offer
f. Dollar flotation cost
g. Percentage flotation cost
Numerical Example (cont.)
Known variables:
a. Number of rights needed to buy one new share, N
b. Value of a right, Ro
Numerical Example (cont.)
c. Ex-rights share price, Me
d. Ex-rights value of a right, Re
Numerical Example (cont.)
e. Amount of funds raised in the rights offer
f. Dollar flotation cost
g. Percentage flotation cost
Happiness is practicing
A firm is looking to raise $10 million with a rights offering of
15 million new shares. The firm hires an investment banker
who will charge 5% on the gross proceeds of the rights
offer. Three days before the record date, the firm’s share
price is priced at $2.50. The number of shares outstanding
on the record date is 50 million. Calculate the S, N, Ro, Me,
Re, and dollar amount of flotation cost.
Net proceeds = $10,000,000
# new shares = 15,000,000
Percentage flotation cost = 0.05
Rights-on share price = Mo = $2.50
# old shares = 50,000,000
Check Answers:
Percentage flotation cost = Dollar flotation cost / Funds raised
=> Dollar flotation cost = Percentage flotation cost x Funds raised
=> Percentage flotation cost x Funds raised = Funds raised – Net proceeds
=> Net proceeds = Funds raised - (Percentage flotation cost x Funds raised)
=> Net proceeds = Funds raised x (1 – Percentage flotation cost)
=> Funds raised = Net proceeds / (1 – Percentage flotation cost)
Funds raised = $10,526,315.79
S = $0.70
N = 3.33333333
Ro = $0.41
Me = $2.09
Re = $0.42
Dollar flotation cost = 526,315.79
End of Lecture 15 on Rights Valuation