2) Smith Ltd has announced a renounceable rights offering to obtain $40 million of equity financing. The subscription price is set at $8 per share. The shares currently sell for $11 per share and there are 20 million shares outstanding.

Required:

1. How many shares are to be issued under the rights issue and what number of shares will an existing owner require to buy one new share?

2. What is the value of the right?

3. What is the theoretical ex-rights share price?

4. If you hold shares in David Smith Ltd, will you gain or lose wealth by the rights issue? Support your answer with calculations. Assume that you have cash to exercise the rights.