Every question, in this case, should be analysed and only one definite answer from the MCQ should be chosen

Klevin Co is considering an extensive rights issue to raise new finance. It currently has 4 million shares and has been very successful over a prolonged period.

The term of the deal are as follows:

- One new share for every 4 held at a price of 90% of the existing market value per share.

- The existing market value is 20 per share (the cum rights price).

One of the directors is unhappy with offering any discounts to existing shareholders. He claims that the companies past success should be enough to encourage shareholders to increase their investments.

Q1: What is the theoretical ex rights price (TERP) per share?

Select one:

a. 18.00

b. 19.60

c. 20.00

d. 24.50

Q2: What would be the effect on the TERP value if the new shares were offered at a 20% discount level whilst raising the same total amount of finance?

Select one:

a. The TERP value not change since the total amount raised would be the same

b. The TERP would increase

c. The TERP would fall

d. The TERP would fall to a level unacceptable to existing shareholders

Q3: Which of the following statements about discounts on a rights issue are true?

Statement 1: The level of discount is simply not relevant to the wealth of a shareholder as long as they accept the right. It is ignorance of the theory that encourages the offer of a discount in most cases.

Statement 2: The bigger the discount the more likely a shareholder is to accept the rights offer in most cases.

Select one:

a. Both statements are true

b. Both statements are false

c. Only statement (1) is true

d. Only statement (2) is true

Q4: Which of the following actions by shareholders would be the worst thing that they could do in relation to a rights issue as far as shareholder wealth is concerned?

Select one:

a. Accept the rights offer without negotiation

b. Renounce their rights and sell them on the open market

c. Save their investment and do nothing

d. Sell 50% of their rights on the open market whilst ignoring the rest

Q5: Which of the following actions will result in the least dilution of control for existing shareholders?

Select one:

a. Accept the rights offer without negotiation

b. Renounce their rights and sell them on the open market

c. Save their investment and do nothing

d. Sell 50% of their rights on the open market