Question

Miller Fruit wants to expand its citrus grove operations. The firm estimates that it needs $8.6 million to buy land and establish its operations. Currently, the firm has 540,000 shares of stock outstanding at a market price per share of $34.80. If the firm decides to raise the needed capital through a rights offering, one right will be issued for each share of stock. The subscription price will be set at $33 a share. How many rights will a shareholder need to purchase one new share of stock in this offering?

Answer 1

2.072 rights

Step-by-step explanation:

Amount needed to buy the land = $8.6 million = $8,600,000

stock outstanding = 540,000

Market price per share = $34.80

subscription price = $33 a share

Now,

Number shares to be issued = ( Amount needed ) ÷ ( subscription price )

= $8,600,000 ÷ $33

= 260606.06 shares

1 rights will be issued per stock

thus,

number of rights required for purchase

= ( stock outstanding ) ÷ ( Number shares to be issued )

= 540,000 ÷ 260606.06

= 2.072 rights