Question

A company has 30,000,000 authorized shares and 20,000,000 that are issued and outstanding. When the common shares (with a par value of $1.00) are trading for $10 in the marketplace, it announces a rights offering where each shareholder will receive one right for each share held, and four rights plus $8.00 will entitle the shareholder to purchase one treasury share.
52. What is the value of one right during the cum-rights period?
a) $.40
b) $.50
c) $2.00
d) $2.25
53. If the rights offering is fully subscribed, how many shares will be issued and outstanding?
a) 20,000,000
b) 24,000,000
c) 25,000,000
d) 36,000,000

Answer 1

Q#52:

Given,

Cost of one share in rights issue= 4 Rights + $8

Market price per share= $10

Therefore, Value of one right= ($10-$8)/4 = $0.50

The answer is choice (b)

Q#53:

Number of shares issued before rights: 20,000,000

Number of rights entitled per share (before rights)=1

Number of rights required per one new share= 4

Therefore, number of new shares added if the rights issue is fully subscribed= 20,000,000/4 = 5,000,000

Therefore, Number of shares issued and outstanding after rights issue= 20,000,000 + 5,000,000

= 25,000,000

The answer is choice (c)