The Board of Directors of Carrington Ltd. is considering the possibility of having a rights issue to raise enough funds to pay off the companys bonds. The company currently has in issue 6 million common shares and bonds outstanding with a market value of $24 million. The companys shares are currently selling for $9.80 and a subscription price of $8 has been recommended based on current state of the stock market.

Required:

a) Determine the number of new shares that would have to be issued and the number of rights that would be required to purchase one new share. (3 marks)

b) Determine the theoretical value of a right during the rights-on period (3 marks)

c) Your cousin owns 500 shares in the company is trying to decide whether to exercise his rights or sell them. He has come to you for advice and wants to know which alternative with result in greater wealth. Advise your cousin, providing calculations to justify the advice given. (8 marks)