Question

he Clifford Corporation has announced a rights offer to raise $40 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a nonrefundable reviewing fee of $3,000 per page. The stock currently sells for $50 per share, and there are 1.6 million shares outstanding. a. What is the maximum possible subscription price? What is the minimum? (Leave no cells blank - be certain to enter "0" wherever required.) b. If the subscription price is set at $40 per share, how many shares must be sold? How many rights will it take to buy one share? (Do not round intermediate calculations. Round your rights needed answer to 2 decimal places, e.g., 32.16.) c. What is the ex-rights price? What is the value of a right? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) d. A shareholder with 1,000 shares before the offering has no desire (or money) to buy additional shares offered as rights. What is his portfolio value before and after the rights offer? (Do not round intermediate calculations and round your answers to nearest whole number, e.g., 32.)

a.	The maximum possible subscription price is
	The minimum possible suscription price
b.	Number of new shares
	Number of rights needed
c.	Ex-rights price
	Value of a right
d.	Portfolio value before rights
	Portfolio value after rights

Answer 1

a). Maximum Subscription Price = Current Stock Price = $50

Minimum Price is anything above $0.

b). Number of new shares = Amount Raised / Subscription Price = $40,000,000 / $50 = 800,000 shares

Number of rights needed = O/S Current Shares / Number of new share offered

= 1,600,000 / 800,000 = 2

c). Shareholder can buy 2 rights on shares for: 2 x $50 = $100

Total Cost = $100 + Subscription Price = $100 + $40 = $140

PX = [NP_RO + P_S] / (n + 1)

= [(2 x $50) + $40] / (2 + 1) = $140 / 3 = $46.67

Px = ex-rights price; N = no. of rights; Ps = Subscription Price;

Value of Right = P_RO - Px = $50 - $46.67 = $3.33

d). Portfolio Value before rights = No. of Shares x Current Market Price = 1,000 x $50 = $50,000

Portfolio Value after rights = [No. of Shares x Px] + [No. of rights x Value of right]

= [1,000 x $46.67] + [1,000 x $3.33] = $46,667 + $3,333 = $50,000