Question

Wuttke Corp. wants to raise $4.1 million via a rights offering. The company currently has 510,000 shares of common stock outstanding that sell for $40 per share. Its underwriter has set a subscription price of $30 per share and will charge the company a spread of 2 percent.

If you currently own 6,000 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?

Answer 1

The number of shares to be sold in order to raise $4.1 million is computed as shown below:

Number of shares to be sold = Amount to be raised / subscription price ( 1 - spread )

= $ 4,100,000 / $ 30 ( 1 - 0.02 )

= 139,456 shares approximately

Rights Needed to buy one share is computed as shown below:

Rights needed = Current shares / No of shares to be sold

= 510,000 / 139,456

= 3.66 approximately

3.66 of current shares is needed to purchase one share of a new issue.

Now, we shall calculate ex right price as

Ex−Rights price= [ (Rights needed x Rights on price) + Subscription price] / (Rights needed+1)

= [ ( 3.66 x $ 40 ) + $ 30 ] / ( 3.66 + 1 )

= $ 37.85

The value of one right is computed as follows:

Value of the Right = Right on price - Ex-Right price

= $ 40 - $ 37.85

= $ 2.15

The proceed from the sale is calculated as follows:

Proceed from the sale = Shares held x Value of the Right

= 6,000 x $ 2.15

= $ 12,900

So we can get $ 12,900 by selling the rights.

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