Question

Prahm Corp. wants to raise $5.4 million via a rights offering. The company currently has 620,000 shares of common stock outstanding that sell for $57 per share. Its underwriter has set a subscription price of $24 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?

Answer 1

Solution:
	By selling rights we can get is $45,608.11
Working Notes:
	Required sales proceeds = Amount raised /(1- Spread of Underwriters)
		=5,400,000/(1-0.05)
		=5,400,000/0.95
		=5,684,210.5263158
	No. of shares must be sold to raise the desired funds = Required sales proceeds / Subscription price
		=5,684,210.5263158/$24
		=236842.1052632
	Number of rights needed   = No of old shares / No of new shares to be issued
		=620,000/236842.1052632
		= 2.6177778 shares
	2.6177778 shares required to have 1 right
	Stock ex-rights = [n x ROP + SP] /(n+1)
	n= no. of Rights required to buy a Right share= 2.6177778
	ROP = Right on price or Cum-Right price = $57
	SP = Subscription price = $24
	Stock ex-rights = [n x ROP + SP] /(n+1)
	=[2.6177778 x 57 + 24 ] /(2.6177778 +1)
	=[173.2133346]/3.6177778
	=47.878378
	Value of a right = ROP - Ex Right price
	ROP = Right on price or Cum-Right price = $57
	Ex-rights price                =$47.878378
	Value of a right = ROP - Ex Right price
	= $57 - $47.878378
	=$9.121622
	By selling rights we can get = No of shares holding x Value of a right
		=5000 x $9.121622
		=$45,608.11
		=$45,608.11
Please feel free to ask if anything about above solution in comment section of the question.