Question

Wuttke Corp. wants to raise $4,195,000 via a rights offering. The company currently has 820,000 shares of common stock outstanding that sell for $52 per share. Its underwriter has set a subscription price of $32 per share and will charge Wuttke a 6 percent spread. If you currently own 7,000 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 net proceeds to the company on a per share basis is the subscription price times one minus the underwriter spread, so:

Net proceeds to the company = $32(1 – .06) = $30.08 per share

So, to raise the required funds, the company must sell:

New shares offered = $4,195,000/$30.08 = 139,461

• The number of rights needed per share is the current number of shares outstandingdivided by the new shares offered, or:

Number of rights needed = 820,000 old shares/139,461 new shares

Number of rights needed = 5.88 rights per share

The ex-rights stock price will be:

P_X = [NP_RO + P_S]/(N + 1)

P_X = [5.88($52) + 32]/6.88

P_X = $49.09

So, the value of a right is:

Value of a right = $52 – $49.09 = $2.91

And your proceeds from selling your rights will be:

Proceeds from selling rights = 7000($2.91)

Proceeds from selling rights = $20370