Question: Supernova makes a public announcement that it will raise equity finance through a rights issue of new shares to existing shareholders to finance a new

Supernova makes a public announcement that it will raise equity finance through a rights issue of new shares to existing shareholders to finance a new project. The new project and the rights issue are announced simultaneously. The project has an NPV of $10 million and requires an initial outlay of $20 million. The rights issue shares will be priced at $2 each. Assume that before making public the information about the new project or its financing, the firm had 20 million shares with a market value of $3 per share. The market is semi-strong form efficient and there are no issuance costs. What is the value of a share in Supernova after the rights issue? What is the value of a right to obtain one of the rights issue shares? Why should an outside investor be unwilling to pay more?

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