Question

Consider the situation faced by the CFO of a company with a market capitalization of $500 Millions of USD, e.g. the firm has 40 million shares outstanding, so the shares are trading at $12.5 per share. The CFO needs to raise $200 Millions of USDs and announces a rights issue. Each existing shareholder is sent 8 right for every share he or she owns. The CFO has not decided how many rights will be required to purchase a share of new stock. At the current price per share, what is the maximum amount of rights the CFO can require stockholders for purchasing a share of new stock and so be able to raise the $200 Millions of USDs?"

Answer 1

Total Market Capitalization = $500 Millions

Shares Outstanding = 40 million

Price per share = $12.5

For every share 8 right has been send to the customer

Company has to raise $200 Millions

Before starting the calcuation we should know what is Right issue. In this case the company needs to raise fresh capital and give option to existing share holder to opt for shares. The company doesn't go to public but only goes to the existing shareholder which have already shares of the company.

Total amount of outstanding shares = 40 million * 8  = 320 Million

Company needs the fund amounting to $200 millons to get this amount compnay needs consent of maximum of 16 million share holders because each shareholder costs 12.5 per share and if the company gets consent from 16 million share holder then it will suffice the purpose of the company.