Question 1 (23 Marks)

1. (8 marks) Acme want to raise $5 million new equity via a rights issue with a subscription price of $50/share. Current shares sell (rights on) for $60 each. Calculate the minimum current value of a right and the ex-rights share price assuming there are 1 million shares outstanding before the rights issue. Check your ex rights share price using another formula.
2. (5 marks) Calculate the probability of a failed issue if the current rights-on stock price is normally distributed with mean of $60 and standard deviation of $10.
3. (6 marks) Just before the rights expire the stock price is $75. Calculate the value of a right and its percentage increase with respect to its value in (a). Calculate the stocks percentage increase and compare it to the rights percentage increase.
4. (4 marks) Show that the holder of N rights is indifferent to exercising or selling them in (c).