Question

A firm decides to raise $1 million with a rights issue.
Each existing shareholder purchases one new share for each four that
they currently hold, with 50,000 shares to be issued. The issue will be
based on a subscription price of $20. Assuming that the current share
market price is $35, calculate the ex-rights price of the company stock.

Answer 1

Current share price of stock = $35 per share

Number of share for new right issue = 50,000 shares

One new share for each four that they currently hold, therefore number of share outstanding = 4 *50,000 = 200,000 shares

The Market Value of shares prior to issue of new shares = $35 * 200,000 = $7,000,000 or $7 million

If Price of new issue = $20 per share

Cash raised from new issue = $20 * 50,000 = $1,000,000 or 1 million

Ex-rights stock price = (Market Value of shares prior to rights issue + Cash raised from new issue)/ Total Number of shares after the new issue

= ($7,000,000 + $1,000,000)/ (200,000 + 50,000)

= $8,000,000/ 250,000

= $32.00 per share