Question

Prahm Corp. wants to raise $4.5 million via a rights offering. The company currently has 510,000 shares of common stock outstanding that sell for $46 per share. Its underwriter has set a subscription price of $21 per share and will charge the company a spread of 5 percent. If you currently own 4,000 shares of stock in the company and decide not to participate in the rights offering, how much money can you get by selling your rights? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

The membership cost of rights offering is lower than the market cost of share. It represents that rights offered by the organization are progressively important to the speculators, utilizing which they can buy the new portions of the organization. If they are not intrigued to participate in the rights offering, they can sell their privileges at the honest evaluation.

Coming up next are steps to ascertain the cash that will be gotten by selling the rights:

Step 1: Compute the number of shares sold

`Number of shares sold = (Amount needed)/( [Subscription price x (1 - Spread)])`

`Number of shares sold = (4,500,000)/( [21 * (1 - 0.05)])`

`Number of shares sold = (4,500,000)/(19.95)`

Number of shares sold = 225,564

Step 2. Compute the number of shares needed to buy one new share:

`Rights needed to buy one new share = (Old shares)/(Shares sold)`

`Rights needed to buy one new share = (510,000 Shares)/(225,564 Shares)`

Rights needed to buy one new share = 2.26

Step 3: Compute the ex-rights stock price:

`Ex-rights stock price = ((Rights needed * Rights on price) + Subscription price)/(Rights needed + 1)`

`Ex-rights stock price = ((2.26 * 46) + 21 )/(2.26+1)`

Ex-rights stock price = $38.33

Step 4: Compute the value of one-right

Value of One-Right = Rights on price - Ex-rights price

Value of One-Right = $46 - $38.33

Value of One-Right = $7.67

Step 5: Compute the proceeds from sale of rights:

Sale proceeds = Shares owned x Value of one right

Sale proceeds = 4,000 Shares x $7.67

Sale proceeds = $30,680

Thus, the amount of $30,680 will be received by selling the rights.

Answer 2

Check the explanation

Step-by-step explanation:

The subscription price of tights offering is lower than the market price of share. It represents that rights offered by the company are more valuable to the investors, using which they can purchase the new shares of the company.

If they are not interested in participating in the rights offering, they can sell their rights at the fair market value.

check the below image to see the following steps in calculating the money that will be received by selling the rights.