Question

Scott's company decided that they would like to sell more common stock via a rights offering. Scott's company has the following characteristics:

Current # of shares outstanding = 12,000,000 (with an additional 1,500,000 through a rights offering)

Each of Scott's existing shareholders will receive one right for each share currently held. Each right will allow each shareholder to purchase 0.125 shares (for each right held).

Scott's company has done well and its share price went from $23 to $50 per share (where it currently trades). The subscription price of the right is $45.

What is the theoretical value of the right using the ex-rights case?

Answer 1

Theroretical value of Ex- Right Price = (Market value of shares in issue + Proceeds from right issue) / Number of shares after right shares

Number of shares already had - 12,000,000

Price per share (Current)  - $50

Market value of shares in issue = Number of shares already had * Price per share

= 12,000,000 * $50

= $600,000,000

Proceeds From Right issue = Number of shares of right issue * Subscription price

= 1,500,000 * 45

= $675,00,000

So, Theroretical value of Ex- Right Price

=  ($600,000,000 + $675,00,000) / (1200,000 + 150,000)

= 667,500,000 / 13,500,000

= $49.44

So, Theoretical ex-right price = $49.44