What is the yield-adjusted theoretical ex-rights price?

CORRECT TEXT

A company has announced a rights issue of 1 new share for every 4 existing shares.

Relevant data:

• The current market price per share is $10.00.

• Rights are to be issued at a 20% discount to the current price.

• The rate of return on the new funds raised is expected to be 10%.

• The rate of return on existing funds is 5%.

What is the yield-adjusted theoretical ex-rights price?

Give your answer to two decimal places.

$ ?

View Answer

Answer: 11.20, 11.2