Question

PRICING RIGHTS

A company wants to raise $100 million. The subscription price is $17, and the current stock price is $27. The firm currently has 2,500,000 shares outstanding.

14. How many rights will it take to purchase one share?

Answer 1

Let X be the new no.of shares issued.

Amount Required = No.of shares issued * subscription price

$ 100 M = X * 17

X = $ 100 M / 17

= 5,882,353

Totaal No. of Shares = New Shares + Old Shares

= 5,882,353 + 2,500,000

= 8,382,353

Theoritical Exright Price = [(Old shares * Old Price) + New funds raised ] / Total No.of shares

= { ( 2,500,000 * 27 ) + 100 M } / 8,382,353

= 167.5 M / 8,382,353

= 19.98

Value of Right = Theoritical Ex Right Price - Subscription Price

= $ 19.98 - $ 17

= $ 2.98

No. of rights required for a share = Subscription Price / Value of Right

= $ 17 / $ 2.98

= 5.70