Clothing Unlimited announced in the financial press on Tuesday 02 June 2020 that it would raise R9 million by means of a fully underwritten rights issue to raise finance for its takeover of children's clothing chain Cool Kids Clothing. For every 5 Clothing Unlimited shares currently held, shareholders would be offered 1 new Clothing Unlimited share at R90 each. 

Clothing Unlimited's share price closed at R120 at the end of trading on Monday 01 June 2020. An investment analyst noted that "rights issues are usually pitched at a healthy discount to the current share price to encourage shareholders to take up their rights". The analyst exclaimed "Clothing Unlimited is taking a lot of risk - they have forecasted a 25% drop in earnings following the rights issue because suddenly there are more shares in issue and about another R9 million in debt. The investment banks are covering themselves here 

REQUIRED: 

 For the rights issue described above, calculate the: 

a. Number of additional shares Clothing Unlimited will be issuing 

b. Percentage discount to the current share price that Clothing Unlimited is offering its shareholders to take up their rights: 

c. Theoretical ex-rights price (TERP) of a Clothing Unlimited share following the rights issue.

d. Expected trading price of one Clothing Unlimited right.

Answer rating: 100% (QA)

ANSWERS a Number of additional shares Clothing Unlimited will be issuing 3000000 b Percentage discou... View the full answer