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Q. Theoretical value of shareholding?
(i) Theoretical value of shareholding
Theoretical ex-rights value =
((No. shares in issue×Market value) + (No. rights shares× rights share price))/ Total shares in issue post rights
((5m×1.60) + (1m×1.30))/ 6m
= $1.55
Subsequent to taking up the rights issue James Brown will hold 10000 + (0·2 × 10000) = 12000 shares. The theoretical worth of the holding at $1·55 per share is thus $18600.
(ii) Theoretical value of rights
The value of the rights per share = Theoretical ex-rights price - Cost of taking up the rights
= $1·55 - $1·30
= $0·25 per share
If James Brown sells all of his rights to 2000 shares he will receive 2000 × $0·25 = $500.
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