Reference no: EM132965794

Question: Nike Ltd has issued share capital of 4 million ordinary shares, with a par value of $1 each share. The board of the company has accepted the proposal for a new venture and therefore needs to raise $2 million.

The finance director has suggested that this finance be raised by way of a 1 for 4 rights issue which will be priced at a 30% discount to the current market price of $3 per share.

Required:
a) Calculate the theoretical ex-rights price per share;
b) Calculate the cash raised;
c) Calculate the value of the rights.

The finance director also recommended having the rights issue underwritten by an investment bank or relevant finance house at the time of issue.

d) Explain underwriting and consider whether underwriting is a valid expense at this time

e) An investment bank sponsoring an issue will usually charge a fee of between 2-4% of the issue proceeds and then pays part of that fee, 1.25-3% of the issue proceeds, to sub- underwriters.

What is the maximum fee that Cheltenham would accept as an underwriting fee if they wish to raise the required amount, net of underwriting costs?

f) Explain why, in general, rights issues are priced at a discount to the prevailing market price of the shares;

g) Calculate and discuss the factors that determine whether the actual ex-rights share price is the same as the theoretical ex-rights share price.