Question

Bell Hill Mfg. is considering a rights offer. The company has determined that the ex-rights price would be $78. The current price is $100 per share, and there are 25 million shares outstanding. The rights offer would raise a total of $50 million. What is the subscription price?

Answer 1

6.5

Step-by-step explanation:

We can calculate Ex-Rights using following formula:

Ex-Rights = (Current Shares * Shares outstanding + Amount Raised) / (Current Shares + Amount Raised / Subscription Price)

Here

Market Value is $100

Shares Outstanding are 25 million

Amount Raised is $50 million

Ex-Rights price is $78

By putting values, we have:

$78 = (($100 * 25m) + $50m) / (25m + (50m/Subscription price))

$78 = ($2550) / (25m + ($50m/Subscription Price))

$78 / ($2550m) = 1 / (25m + ($50m/Subscription Price))

0.0000030588 = 1 / (25m + ($50m/Subscription Price))

Taking reciprocal, we have:

1 / 0.0000030588 = (25m + ($50m/Subscription Price))

$32.6923m = $25m + $50m / Subscription Price

$32.6923m - $25m = $50m / Subscription Price

$7.6923m = $50m / Subscription Price

$7.6923m / $50m = 1 / Subscription Price

0.153846 = 1 / Subscription Price

Taking Reciprocal, we have:

Subscription Price = 6.5