Question 7.Act.9: An investor with 2,000 shares in Shaw Holdings plc (see Exam...
An investor with 2,000 shares in Shaw Holdings plc (see Example 7.1) 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.
Calculate the effect on the net wealth of the investor of each of the options being considered.
Before the rights issue, the position of the investor was:
| £ | |
| Value of shares (2,000 × £1.60) | 3,200 |
If she takes up the rights issue, she will be in the following position:
| £ | |
| Value of holding after rights issue ((2,000 + 500) × £1.54) | 3,850 |
| Less Cost of buying the rights shares (500 × £1.30) | \underline{(650)} |
| \underline{3,200} | |
If she sells the rights, she will be in the following position:
| £ | |
| Value of holding after rights issue (2,000 × £1.54) | 3,080 |
| Sale of rights (500 × £0.24) | \underline{120} |
| \underline{3,200} | |
If she lets the rights offer lapse, she will be in the following position:
| £ | |
| Value of holding after rights issue (2,000 × £1.54) | \underline{3,080} |
As we can see, the first two options should leave her in the same position concerning net wealth as she was in before the rights issue. Before the rights issue she had 2,000 shares worth £1.60 each, or £3,200. However, she will be worse off if she allows the rights offer to lapse than under the other two options. In practice, the business may sell the rights offer on behalf of the investor and pass on the proceeds in order to ensure that she is not worse off as a result of the issue.