Question
Covy plc has paid-up capital consisting of 250 million ordinary shares. The companys directors have made a public announcement that the firms R&D wing has
Covy plc has paid-up capital consisting of 250 million ordinary shares. The companys directors have made a public announcement that the firms R&D wing has developed a new vaccine for COVID-19. Following the announcement, the companys share price increased to its current level of 4.80. The company has now made a further announcement to the effect that it is going to raise finance for mass producing the new product. The new finance, amounting to 132 million, is to be raised by means of a rights issue at a discount of 45% below the market price. You are an independent financial adviser and you are contacted by a client holding 5,000 shares in Covy plc. As she already has sufficient exposure in the pharmaceutical industry, she would prefer to diversify her portfolio rather than increase her shareholding in Covy plc. At the same time, she is reluctant to miss the opportunity of acquiring shares at a discount; nor does she want her stake in the company to be diluted. She is therefore seeking your advice on whether to take up the rights issue or sell the rights. At the companys board meeting one of Covy plcs directors has asked why the company is not making a public issue at a better subscription price, instead of making a rights issue at such a large discount. Required: (a) Calculate the theoretical ex-rights price of an ordinary share of Covy plc following the rights issue of 132 million, and identify the price at which the rights are likely to be traded. (6 marks) (b)Evaluate the two alternatives being considered by the owner of the 5000 shares and explain whether, in theory, either of the alternatives would leave her worse off. (10 marks) (c) Discuss the advantages and disadvantages of raising capital through a rights issue rather than a public issue.
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