Question

. A company wants to raise $2 million through a rights offering. The subscription price is $4, and the current stock price is $5. The firm currently has 1,000,000 shares outstanding. How many shares must be issued

Answer 1

Answer: 0.33

Step-by-step explanation:

Funds Required. = 2,000,000

Subscription Price = 4.00

Total New Shares =2000000/4 = 500,000

Current no of shares outstanding = 1,000,000

Right ratio =500000/1000000 = 0.5

Therefore, per share 0.5 right would be issued and 2 rights will be required to buy 1 share

Share price after right issue will be:

=(Share price before rights + the subscription price per share)/Total number of shares

= ((1000000 × 5)+(500000 ×4) ÷ (1000000+500000)

= 4.67

Value of right = 5 - 4.67

= 0.33

Answer 2

Answer:

A.$500,000

B. $2 Right

C.$0.33

Step-by-step explanation:

A.The amount that the company wants to raise ÷The subscription price = Shares Issued

Amount raise

$2,000,000

Subscription price $4

Hence:

$2,000,000÷$4

=$500,000

Therefore $500,000 is the shares to be issued out by the company

B.

Rights that it will take to purchase one share.

1,000,000/500,000 = 2 rights

C. The Investors have 2 shares

The MV of the portfolio before the rights was issued= 2x$5 = $10

The MV of portfolio after the rights was issued =

$10+$4= $14

The price per share :

$14/3

=$4.67

The value of rights :

$5-$4.67

= $0.33