Shaw Holdings plc has 20 million ordinary shares of 50p in issue. These shares are currently valued on the Stock Exchange at £1.60 per share. The directors of Shaw Holdings believe the company requires additional long-term capital and have decided to make a one-for-four rights issue at £1.30 per share.
An investor with 2,000 shares in Shaw Holdings has contacted you for investment advice. She is undecided whether to take up the rights issue, sell the rights, or allow the rights offer to lapse.
Required
(a) Calculate the theoretical ex-rights price of an ordinary share.
(b) Calculate the value at which the rights are likely to be traded.
(c) Evaluate each of the options being considered by the owner of 2,000 shares.
(d) Explain why rights issues are usually made at a discount.
(e) From the company's viewpoint, how critical is the pricing of a rights issue likely to be?