Question

A Company’s common is selling for $60 per share. It needs $210 million for an expansion project and the IBs suggests the funds could be raised through a right offering. The subscription price is set $42. there are 50 million shares outstanding

a. What is the theoretical value of the stock ex-right?

b. What is the value of one right?

c. If you didn't have the funds to take advantage of the right offering or if you have less than the number of rights required to buy one new share, what course of action (s) would you take?

Answer 1

.a Theoretical value of stock ex right:

Market value before the right issue=$60*50 million=$3,000 million

Cash raised from right issue=$210 million

Total Market value of shareholders’ equity after right issue=(3000+210)=$3,210 million

Number of new shares issued=($210 million/$42)=5 million shares

Total number of shares after the right issue=(50+5)=55 million

Theoretical ex right price=$(3210/55) =$58.36

.b. Value of one right:

Market price= $58.36(ex right)

Subscription price=$42

Value of one right=($58.36-$42)=$16.36

If 10 rights are required to buy one share

Value of one right=$1.64

.c.If you cannot subscribe to the rights ,

You can sell the right in the market