Question

A company wishes to raise $2 million through a rights offering. The subscription price for each share is $10. The company currently has 600,000 shares outstanding, each selling at a current price of $20. What is the ex-rights price of the stock?

Answer 1

Given,

Number of shares before rights issue (A)= 600,000

Amount to be raised= $ 2 Million

Subscription price per share= $10

Therefore, number of shares to be issued (B) = 2,000,000/10 = 200,000

Number of shares after rights issue (N)= A + B= 600,000+200,000 = 800,000

Current market price per share= $20

Therefore, current market value of shares (V0) = 600,000*$20 = $12,000,000

Theoretical Ex-rights price per share= (Current Value + Amount raised)/N

=$12,000,000 + $2,000,000)/800,000 = $17.50