a.
To determine: The ex-rights stock price, the value of a right, and the subscription price.
Rights Offer:
In rights offer, common stock is issued to the existing shareholders. Here, the shareholder issues an option in which a certain number of shares can be bought at a specific price and at a specific duration.
Ex-rights stock price:
The ex-rights stock price is where the right, which are connected with the stock is separated.
a.
Explanation of Solution
Solution:
Given,
The selling price of company stock is $37 per share.
The number of outstanding shares is 1 million.
The firm plans to raise $2.5 million to finance a new project.
Two shares of outstanding stock are entitled to purchase one additional share of the new issue.
Calculation of the ex-rights stock price:
The formula to calculate the ex-rights stock price is,
Substitute $37,000,000 for the current market value, $2,500,000 for proceeds from the offer, 1,000,000 for the number of old shares and 500,000 for the new shares (refer working note) in the above formula.
Hence, The ex-rights stock price is $26.33.
Calculation of the subscription price:
The formula to calculate the subscription price is:
Substitute $2,500,000 for the amount raised and 500,000 for the number of shares offered in the above formula.
Hence, The subscription price is $5.
Calculation of the value of a right:
The formula to calculate the value of a right is:
Substitute $26.33 for the ex-rights price, $5 for the subscription price and 2 for the rights needed to buy a share of stock in the above formula.
Hence, The value of a right is $10.67.
Working note:
Calculation of the new shares:
The new shares offered is 500,000.
Calculation of the current market value:
Hence, the current market value is $37,000,000.
Thus, the ex-rights stock price is $26.33, the subscription price is $5 and the value of a right is $10.67.
b.
To determine: The ex-rights stock price, the value of a right and the subscription price.
b.
Explanation of Solution
Solution:
Given,
The selling price of company stock is $37 per share.
The number of outstanding shares is 1 million.
The firm plans to raise $2.5 million to finance a new project.
Four shares of outstanding stock are entitled to purchase one additional share of the new issue.
Calculation of the ex-rights stock price:
The formula to calculate the ex-rights stock price:
Substitute $37,000,000 for the current market value, $2,500,000 for proceeds from the offer, 1,000,000 for the number of old shares and 250,000 for the new shares (refer working note) in the above formula.
Hence, the ex-rights stock price is $31.6.
Calculation of the subscription price:
The formula to calculate the subscription price:
Substitute $2,500,000 for the amount raised and 250,000 for the number of shares offered in the above formula.
Hence, the subscription price is $10.
Calculation of the value of a right:
The formula to calculate the value of a right:
Substitute $31.60 for the ex-rights price, $10 for the subscription price and 4 for the rights needed to buy a share of stock in the above formula.
Hence, the value of a right is $5.40.
Working note:
Calculation of the new shares:
Hence, the new shares offered is 250,000.
Calculation of the current market value:
Hence, the current market value is $37,000,000.
Thus, the ex-rights stock price is $31.60, the subscription price is $10 and the value of a right is $5.40.
c.
To determine: The change in the wealth of the stockholder from part a. to part b.
c.
Explanation of Solution
Solution:
Given,
The selling price of company stock is $37 per share.
The number of outstanding shares is 1 million.
The firm plans to raise $2.5 million to finance a new project.
The assumption is that the shareholder holds 4 shares and it will implement in both the cases.
Calculation of the current portfolio value:
The formula to calculate the current portfolio value is:
Substitute 4 (assumed) for the number of shares and $37 for the stock price in the above formula.
Hence, the current portfolio value is $148.
Calculation of the new portfolio value in case of part a.
The formula to calculate the new portfolio value is,
Substitute 6 for the number of shares (refer working note) and $26.33 for the ex-rights price, 2 for numebr of rights and $5 for the subscription price in the above formula.
Hence, the new portfolio value is $147.98.
Calculation of the new portfolio value in case of b:
The formula to calculate the new portfolio value:
Substitute 5 for the number of shares (refer working note) and $31.60 for the ex-rights price and $10 for the subscription price and 1 for the number of right in the above formula.
Hence, the new portfolio value is $148.
Working note:
Calculation of the new number of shares in case of part a.:
In this case, the investor will get 2 new shares and so the new number of shares will be 6
Calculation of the new number of shares in case of part b:
In this case, the investor will get 1 new share and so the new number of shares will be 5
Calculation of the difference of the portfolio value:
Hence, the difference in the portfolio value is $0.02.
Thus, the position of the shareholder will increase by $0.02
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Chapter 20 Solutions
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- Quantum Tech Corp. is currently selling at $25 per share. There are 4 million shares outstanding. The company is planning to raise $8 million to finance a new project. Assuming 100% exercise of rights, what are the (1) ex-rights stock price, (2) the value of a right, and (3) the appropriate subscription prices under the following scenarios? a. Two shares of outstanding stock are entitled to purchase one additional share of the new issue. b. Four shares of outstanding stock are entitled to purchase one additional share of the new issue. c. In scenario b, how far could the stock price fall before shareholders would be unwilling to exercise their rights?arrow_forwardMyers Inc. currently has 5, 750,000 shares outstanding, and they trade at a price of $23.76. They need to raise $35,000,000 in new funding, and will execute a Rights Offering at a subscription price of $18.00 per share. At the current share price, what will be the price of one Right leading up to the subscription? Group of answer choices $3.04 $1.46 $1.74 $22.30 $2.96arrow_forwardA hypothetical corporation, Cascade Strategic & Innovative Solutions, has decided to raise capital through a rights offering. The company has 2,000,000 outstanding shares of stock with a market value of $55 per share. Cascade would like to raise an additional $15,000,000 in capital through a rights offering. The company will set the subscription price at $25 per new share. What is the value of one right in this scenario? $10 approximately $8.33 approximately $6.92 approximately $12.69arrow_forward
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- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT