Question

The Timken Company has announced a rights offer to raise $5.1 million. The company's stock currently sells for $34 per share, there are 1.207 million shares outstanding, and one right will be granted for each outstanding share. The subscription price is set at $30 per share. What is the ex-rights price per share?

Multiple Choice

• $33.58

• $33.51

• $33.09

• $32.87

• $33.42

Answer 1

Number of new shares to be issued

Number of new shares to be issued = Amount raised / subscription price per share

= $5,100,000 / $30 per share

= 170,000 shares

Number of rights needed

Number of rights needed = Number of shares outstanding / Number of new shares to be issued

= 1,207,000 shares / 170,000 shares

= 7.10 right per share

Ex-rights price per share

Ex-rights price per share = [Subscription price per share + (Number of rights needed x selling price per share)] / [1 + Number of rights needed]

= [$30 + (7.10 x $34)] / [1 + 7.10]

= [$30 + $241.40] / 8.10

= $271.40 / 8.10

= $33.51 per share

“Hence, the ex-rights price per share will be $33.51 per share”