Maxwell Ltd is a listed biotechnology company. On 5 May 2014 it

announced a 1-for-3 renounceable rights issue at a subscription price of

$6.20 per share with an ex-rights date of 25 May. The company also

announced that funds raised by the issue would be used to establish

production facilities for its new anti-malaria drug that recently passed its

final clinical trials. The share price rose from $6.90 to $7.05 after those

announcements. The closing price of Maxwell shares on 24 May was $7

a) What is a renounceable rights issue?

(b) What is the most likely explanation for the share price rise on 5 May after the

company's announcements?

(c) What do you expect the price of the shares to be on 25 May? Show all

calculations

(d) What is the theoretical value of a right? Show all calculations.

(e) Explain why the share price change from 24 May to 25 May does not reflect

any change in shareholders' wealth