Question

Happy Inc plans to raise $7,200,000 via a rights offering. Goldman serves as the underwriter of the offering and charges 10 percent spread from the proceeds of selling new shares. The subscription price of the shares offered is $40 per share. The number of shares outstanding prior to the rights offering is 1,000,000 and the rights-on price is $60 per share. You do not hold any share of the stock as of the ex-rights date (and do not have any rights), but plan to buy 1,000 new shares offered via the rights offering. C) How many rights are needed for an investor to buy one new share via rights offering? D) What is the ex-rights stock price? E) How much do you need to pay to purchase enough rights from existing investors who hold rights to buy the demanded new shares?

Answer 1

Underwriter spread from rights issue is 10%
So Happy Inc needs to raise (7200000/0.9)=$8,000,000 to get Net $7,200,000
So Gross amount to be raised as Rights issue	$         8,000,000.00
Price per Rights issue =S	$                      40.00
No of Rights share to be issued =$8M/40=	200,000
No of shares existing before rights issue	1,000,000
So no of Existing Rights required per new share =1,000,000/200,000=N=	5.00	Ans C
Rights on price =P0=	$                      60.00
Ex Rights Price =(N*P0+S)/(N+1)=(5*60+40)/(5+1)=$56.67		Ans D
Value of Each right =(P0-S)/(N+1)=(60-40)/6=$3.33
Required inventment in new shares =1,000 nos
No of Rights required =1000*5=5,000
Value per rights =$3.33
So Purchase price of 5,000 rights=5,000*3.33=$16,650		Ans E