Question

Happy Memories, Inc. is proposing a rights offering. Presently there are 300,000 shares outstanding at $86 each. There will be 50,000 new shares offered at $78 each.

a.	What is the new market value of the company?

b.	How many rights are associated with one of the new shares?

c.	What is the ex-rights price? (Round your answer to 2 decimal places.)

d.	What is the value of a right? (Round your answer to 2 decimal places.)

Answer 1

a. The new market value is computed as shown below:

= 300,000 x $ 86 + 50,000 x $ 78

= $ 29,700,000

b. The rights are computed as shown below:

= Old shares / New shares

= 300,000 / 50,000

= 6

c. The ex right price is computed as follows:

= Value computed in part a above / (old shares + new shares)

= $ 29,700,000 / 350,000

= $ 84.86 Approximately

d. The value of a right is computed as follows:

= Old price per share - price per share computed in part c

= $ 86 - $ 84.86

= $ 1.14 Approximately

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