Question

Leah, Inc., is proposing a rights offering. Presently there are 200,000 shares outstanding at $66 each. There will be 40,000 new shares offered at $50 each. a. What is the new market value of the company? (Do not round intermediate calculations.) b. How many rights are associated with one of the new shares? (Do not round intermediate calculations.) c. What is the ex-rights price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) d. What is the value of a right? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

a. New market value = (Current shares outstanding * Stock price) + (Rights offered * Rights price)

New market value = (200,000 * $66) + (40,000 * $50)

New market value = $15,200,000

b. Number of rights needed = Number of shares outstanding / Rights offered

Number of rights needed = 200,000 old shares/40,000 new shares

Number of rights needed = 5 rights per new share

c. Ex-rights price = New market value of the company / Total number of shares outstanding after the rights offer

Ex-rights price = $15,200,000 / (200,000 + 40,000)

Ex-rights price = $63.33

d. Value of a right = $66.00 – $63.33

Value of a right = $2.67