Question

The Clifford Corporation has announced a rights offer to raise $17 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a nonrefundable reviewing fee of $6,000 per page. The stock currently sells for $42 per share, and there are 2.9 million shares outstanding. a. What is the maximum possible subscription price? What is the minimum? (Leave no cells blank - be certain to enter "0" wherever required.) b. If the subscription price is set at $34 per share, how many shares must be sold? How many rights will it take to buy one share? (Do not round intermediate calculations. Round your rights needed answer to 2 decimal places, e.g., 32.16.) c. What is the ex-rights price? What is the value of a right? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) d. A shareholder with 2,000 shares before the offering has no desire (or money) to buy additional shares offered as rights. What is his portfolio value before and after the rights offer? (Do not round intermediate calculations and round your answers to nearest whole number, e.g., 32.)

Answer 1

Answer:

A.Maximum possible subscription price $42 per shares

Minimum price $0

B.Number of new shares $500,000

Numbers of right needed 5.8

C.Ex-rights price $40.82

Value of a right $1.18

D.Portfolio value before the right offer $84,000

Portfolio value after the right offer $84,000

Step-by-step explanation:

A.

The maximum possible subscription price based on the information given will be $42 per Shares

The minimum price will be anything that is greater or higher that $0

B. Calculation for how many shares must be sold

Using this formula

Number of new shares =Journal of Financial Excess amount /Subscription price per share

Let plug in the formula

Number of new shares=$17,000,000/ $34 per share

Number of new shares=$500,000

Calculation for how many rights will it take to buy one share

Using this formula

Numbers of right needed=Shares Outstanding/Number of new Shares

Let plug in the formula

Numbers of right needed=$2,900,000/$500,000

Numbers of right needed=5.8

C. Calculation for the ex-rights price

Using this formula

Ex-rights price=(Numbers of right needed*Maximum possible subscription price +Subscription price per share)/(Numbers of right needed+ One shares)

Let plug in the formula

Ex-rights price=(5.8*$42+$34)/(5.8+1)

Ex-rights price=$277.6/6.8

Ex-rights price=$40.82

Calculation for the value of a right

Using this formula

Value of a right =maximum possible subscription price-Ex-rights price

Let plug in the formula

Value of a right=$42-$40.82

Value of a right=$1.18

D. Calculation for What is his portfolio value before the right offer

Using this formula

Portfolio value before the right offer= Shareholders Shares *Maximum possible subscription price

Let plug in the formula

Portfolio value before the right offer=2,000*42

Portfolio value before the right offer=$84,000

Calculation for What is his portfolio value after the right offer

Using this formula

Portfolio value after the right offer=(Shareholders Shares*Ex-rights price) +(Shareholders Shares*Value of a right)

Let plug in the formula

Portfolio value after the right offer=(2,000*40.82)+(2,000*1.18)

Portfolio value after the right offer=$81,640+$2,360

Portfolio value after the right offer=$84,000