Question

Bell Hill Mfg. is considering a rights offer. The company has determined that the ex-rights price would be $72. The current price is $82 per share, and there are 40 million shares outstanding. The rights offer would raise a total of $80 million.

What is the subscription price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Old shares outstanding = 40mn

Amount raised = $80mn

Current share price = $82

Ex-rights price = $72

Let us say subscription price be Sx

Number of new shares= Amount raised / Subscription price

So, Number of new shares = $80 mn/Sx

and Ex rights number of shares(N) = Old shares outstanding/New shares outstanding

N= 40/(80/Sx) = 0.5Sx (i)

The equation of Ex-rights price is

(New shares*Issue price +Old shares*Market price)/(New shares+Old shares)

Ex-right stock price = [NPRO+PS]/(N+1)

72 = [N*(82)+Sx]/(N+1)

Put the value of N from (i)

72 = [82*(0.5Sx) + Sx]/(0.5Sx+1)

72 = 42Sx/(0.5Sx+1)=> 36Sx+72 = 42Sx=> Sx = $12