Question

Prahm Corp. wants to raise $5.5 million via a rights offering. The company currently has 610,000 shares of common stock outstanding that sell for $56 per share. Its underwriter has set a subscription price of $25 per share and will charge the company a spread of 6 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.)

Answer 1

Net proceeds = Subscription price * (1 - underwriter spread)
= $25 * (1 - 0.06)
= $25 * 0.94
= $23.5

New shares offered = $5,500,000 / $23.5 = 234,042.55

Number of rights needed per share = 610,000 / 234,042.55 = 2.60636

The ex-rights stock price = ((2.60636 * $56) + $25) / (1 + 2.60636)
= 170.95636 / 3.60636
= 47.40408

Value of right = $56 - $47.40408 = $8.5959 per share

Proceeds from selling the right = 4,000 shares * $8.5959 = $34,383.67

Proceeds from selling the right = $34,383.67

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