1. Lecture 15 Rights Valuation

2. Topics covered in this lecture 1.Definition of variables 2.Formulas 3.Numerical Example 4.Practice Question

3. Variables Funds raised Dollar or percentage flotation cost Number of new shares Number of old shares Subscription price = S Number of rights needed to buy one new share = N Theoretical value of a right = Ro Rights-on share price = Mo Ex-rights share price = Me Ex- rights value of a right = Re

4. Formulas Group I - Related to Rights Valuation: 1.Subscription price = S = Funds raised / Number of new shares 2.Number of rights needed to buy one new share = N = # old shares / # new shares 3.Value of a right = Ro = (Mo – S) / (N + 1) 4.Ex-rights share price = Me = Mo – Ro 5.Ex-rights value of a right = Re = (Me – S) / N Group II - Related to Flotation Cost: 1.Dollar flotation cost = Funds raised – Net proceeds 2.Percentage flotation cost = Dollar flotation cost / Funds raised

5. Numerical Example On November 1 2011, XYZ Company announced a rights offering to sell 12 million shares at a subscription price of $1.20 per share. The record date was November 10, 2011. The number of shares outstanding on the record date was 48 million. The shares of the company were trading at a closing price of $3.00 per share on November 7, 2011, three business days before the record date. The net proceeds to the company were $13,392,000. Calculate the following: a. Number of rights needed to buy one new share, N b. Value of a right, Ro c. Ex-rights share price, Me d. Ex-rights value of a right, Re e. Amount of funds raised in the rights offer f. Dollar flotation cost g. Percentage flotation cost

6. Numerical Example (cont.) Known variables: a. Number of rights needed to buy one new share, N b. Value of a right, Ro

7. Numerical Example (cont.) c. Ex-rights share price, Me d. Ex-rights value of a right, Re

8. Numerical Example (cont.) e. Amount of funds raised in the rights offer f. Dollar flotation cost g. Percentage flotation cost

9. Happiness is practicing A firm is looking to raise $10 million with a rights offering of 15 million new shares. The firm hires an investment banker who will charge 5% on the gross proceeds of the rights offer. Three days before the record date, the firm’s share price is priced at $2.50. The number of shares outstanding on the record date is 50 million. Calculate the S, N, Ro, Me, Re, and dollar amount of flotation cost. Net proceeds = $10,000,000 # new shares = 15,000,000 Percentage flotation cost = 0.05 Rights-on share price = Mo = $2.50 # old shares = 50,000,000

10. Check Answers: Percentage flotation cost = Dollar flotation cost / Funds raised => Dollar flotation cost = Percentage flotation cost x Funds raised => Percentage flotation cost x Funds raised = Funds raised – Net proceeds => Net proceeds = Funds raised - (Percentage flotation cost x Funds raised) => Net proceeds = Funds raised x (1 – Percentage flotation cost) => Funds raised = Net proceeds / (1 – Percentage flotation cost) Funds raised = $10,526,315.79 S = $0.70 N = 3.33333333 Ro = $0.41 Me = $2.09 Re = $0.42 Dollar flotation cost = 526,315.79

11. End of Lecture 15 on Rights Valuation