The management of Memphis plc (Problem 8.4) is reconsidering its decision on the rights issue price. It is now contemplating an issue price of £1 per new share. One of its concerns is the effect that the issue price will have on the wealth of its existing shareholders. You have been asked to advise.

Calculate the effect on the wealth of a person who owns 200 shares in Memphis plc before the rights issue, assuming in turn a rights issue price of £0.80 and £1.00. In each case make your calculations on the basis both that the shareholder takes up the rights, and that the shareholder sells the rights.

Taking account of all of the factors, what would you advise Memphis plc to do about the rights issue price?