Question

Prahm Corp. wants to raise $5.3 million via a rights offering. The company currently has 590,000 shares of common stock outstanding that sell for $54 per share. Its underwriter has set a subscription price of $27 per share and will charge the company a spread of 6 percent.

If you currently own 7,000 shares of stock in the company and decide not to participate in the rights offering, how much money can you get by selling your rights? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Proceeds from the sale of rights

=> Net Proceeds per share = Subscription price per share x (1 – Spread)

= $27*(1 – 0.06)

= $25.38 per share

=> New shares offered =money raised/net proceeds per share = 5300000/25.38 =  208826 Shares

=> Number of rights needed = current shares/New share offered = 590000/208826 = 2.82532

=> The Ex-rights stock price will be

Ex-rights stock price = ((Number of rights needed * selling price per share) + Subscription price) + (Number of rights needed + 1)

= ((2.82532*54) + $27 per share) / (2.82532 + 1) = $46.94177 per share

So, the value of a right = Selling price per share - Ex-rights stock price

= $54 - $46.94177

= $7.05823 per share

Therefore, proceeds from selling the rights will be

= Number of shares * value of a right

= 7000*7.05823

= $49407.62

Proceeds from sale of rights will be $49407.62