Question

xyz corporation has 25,000 shares outstanding at $100 each. it wants to raise $500,000 by a rights offering with a $80 subscription price. how many rights are required to purchase one new share?

Answer 1

To determine the number of rights needed to purchase one new share in XYZ Corporation's rights offering, divide the total market value of outstanding shares by the result of the funds to be raised divided by the subscription price. In this case, 400 rights are required for one new share.

Step-by-step explanation:

The student's question pertains to a common business operation known as a rights offering. Here, XYZ Corporation wants to raise additional funds by issuing new shares to its existing shareholders proportionate to their current holdings, which gives them the 'right' to purchase additional shares at a specified price before these shares are offered to the public.

To calculate how many rights are needed to buy one new share in a rights offering, a simple formula can be used: Number of rights required = (Market value of outstanding shares) / (Funds to be raised / Subscription price).

For XYZ Corporation, which has 25,000 shares outstanding valued at $100 each, the total market value is $2,500,000. To raise $500,000 at an $80 subscription price, we calculate:

Number of rights needed = $2,500,000 / ($500,000 / $80) = $2,500,000 / 6,250 = 400 rights.

Therefore, you would need 400 rights to purchase one new share in the rights offering of XYZ Corporation.