Question

Prahm Corp. wants to raise $3.7 million via a rights offering. The company currently has 470,000 shares of common stock outstanding that sell for $30 per share. Its underwriter has set a subscription price of $25 per share and will charge the company a spread of 5 percent. If you currently own 4,000 shares of stock in the company and decide not to participate in the rights offering, how much money can you get by selling your rights? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Your proceeds from sale of rights $

Answer 1

- Net Proceeds = $25 x [1 – 0.05] = $23.75 per share

- New shares offered = $37,00,000 / $23.75 = 1,55,789 Shares

- Number of rights needed = 370,000 Shares / 1,55,789 Shares = 3.016892

- The ex-rights stock price will be

= [ (3.016892 x $30) + 25] / (3.016892 + 1) = $28.7553

- So, the value of a right = $30 - $28.7553 = 1.24474 per share

Therefore, proceeds from selling the rights will be

= 4,000 Shares x 1.24474 per share

= $4,978.97

“The proceeds from sale of rights = $4,978.97”