Question

Yonkers Inc. is issuing new common shares in a rights offer in order to raise $10 million for a new project. The subscription price for each new share is $10. The firm currently has 2 million common shares outstanding, each priced at $25 in the market. What is the price of each right?

Select one:

a. $1

b. $2

c. $5

d. $10

e. $15

Answer 1

Amount raised=   $10,000,000
Subscription price =   $10
No of right shares = 10000000/10=   1000000
Existing shares=   2000000
Current market price=   $25

Ex-Right price = (No of shares held*Market price)*(Right shares*Right price)/(No of shares held + Right shares)  
=((2000000*25)+(1000000*10))/(2000000+1000000)  
=$20  
  
Value of one right = Stock price - Ex-right price  
=25-20  
=$5  
  
So price of each right is $5