Question

Yonkers Ltd. is issuing 500,000 new shares in a rights offer. The company wants to ensure that the ex-rights share price is $75. Before the rights offer, the company has two million shares outstanding. If the rights were each priced at $10, what is the subscription price?

Answer 1

Given that the company has two million shares outstanding
Number of rights required to buy one share = Existing shares/New shares
=2000000/500000 = 4
Price of 1 right (say P1) = 10
Ex-rights share price is $75 and rights were each priced at $10.
So, the share price =$75+$10=$85
Subscription price =Share price -(P1*(N+1))

Here, N refers to the number of rights required to buy one share
=85-(10*(4+1)) =85-50 = $35

Answer: Hence, the subscription price is $35