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(a) ABC company has announced a rights offer to issue 2,000,000 new shares at a $11...

(a) ABC company has announced a rights offer to issue 2,000,000 new shares at a $11 subscription price. There are 5,000,000 shares outstanding trading at $12 each. Calculate the ex-rights price and the value of a right. (Show your calculations).

(b) ABC company issued an annual coupon convertible bond with a coupon rate of 10% and a face value of $1,000. The bond will mature 2 years from today. The annual market interest rate is 10%. The conversion ratio is 40 shares. The current stock price is $35 per share.

(i) Calculate the option value of the bond if each convertible bond is trading at $1,520. (Show your calculations).

(ii) Explain the meaning of your answer in part (i) above.

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