3) Nixon Corporation has planned right issue of 50,000,000 Ordinary shares which has par value of PKR 10/- each. The stock of Nixon Corporation is illiquid in nature so therefore, the right issue price will be 60% discount to the current market price which is PKR 80/- per share. The proceeds from this right issue will be utilized for Balancing, Modernization and Replacement (BMR) of existing unit. A local brokerage house has been appointed as underwriter by the Company for the subject right issue. The brokerage house has approached other financial institutions for underwriting commitment in the subject right issue. Underwriting Commission will be 0.80% and Take up Commission will be 1.20%. East West Bank has given underwriting commitment of PKR 800Mn for the aforementioned right issue. Required: (a) What will be the underwriting and take up commission amount for East West Bank if right issue is 70% subscribed? (2 marks) (b) After 6 months of this right issue, current market price of the stock is PKR 72/share and the Portfolio Manager of East West Bank wants to sell 40% shares which were taken up by the Bank as part of underwriting commitment in the right issue. Which type of strategy the Portfolio Manager should opt to execute the sell transaction in next 2 days: i) At price level of PKR 70/share? ii) At current market price level? iii) What will be the capital gain / (loss) in both types of execution strategy? (4 marks) 3) Nixon Corporation has planned right issue of 50,000,000 Ordinary shares which has par value of PKR 10/- each. The stock of Nixon Corporation is illiquid in nature so therefore, the right issue price will be 60% discount to the current market price which is PKR 80/- per share. The proceeds from this right issue will be utilized for Balancing, Modernization and Replacement (BMR) of existing unit. A local brokerage house has been appointed as underwriter by the Company for the subject right issue. The brokerage house has approached other financial institutions for underwriting commitment in the subject right issue. Underwriting Commission will be 0.80% and Take up Commission will be 1.20%. East West Bank has given underwriting commitment of PKR 800Mn for the aforementioned right issue. Required: (a) What will be the underwriting and take up commission amount for East West Bank if right issue is 70% subscribed? (2 marks) (b) After 6 months of this right issue, current market price of the stock is PKR 72/share and the Portfolio Manager of East West Bank wants to sell 40% shares which were taken up by the Bank as part of underwriting commitment in the right issue. Which type of strategy the Portfolio Manager should opt to execute the sell transaction in next 2 days: i) At price level of PKR 70/share? ii) At current market price level? iii) What will be the capital gain / (loss) in both types of execution strategy? (4 marks)
