Question

Prahm Corp. wants to raise $4.1 million via a rights offering. The company currently has 470,000 shares of common stock outstanding that sell for $42 per share. Its underwriter has set a subscription price of $17 per share and will charge the company a spread of 5 percent. If you currently own 5,000 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

Proceeds from the sale of rights

- Net Proceeds per share = Subscription price per share x (1 – Spread)

= $17 per share x (1 – 0.05)

= $17 per share x 0.95

= $16.15 per share

- New shares offered = 253,870 Shares [$41,00,000 / $16.15 per share]

- Number of rights needed = 1.85134 [470,000 Shares / 253,870 Shares]

- The Ex-rights stock price will be

Ex-rights stock price = [(Number of rights needed x selling price per share) + Subscription price] + [Number of rights needed + 1]

= [(1.85134x $42 per share) + $17 per share] / [1.85134x + 1]

= [$77.7562+ $17] / 2.85134

= $33.23216 per share

value of a right = Selling price per share - Ex-rights stock price

= $42 per share - $33.23216 per share

= $8.76784 per share

so, income from selling the rights will be

= Number of shares x value of a right

= 5000Shares x $8.76784 per share

= $43,839

so, the Proceeds from sale of rights = $43,839

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