Question

Moullierat Mfg. is considering a rights offer. The company has determined that the ex-rights price will be $98. The current price is $106 per share, and there are 30 million shares outstanding. The rights offer would raise a total of $50 million.

What is the subscription price?

Answer 1

Solution:
	Subscription price   $16.90
Working Notes:
	Stock ex-rights = [n x ROP + SP] /(n+1)
	n= no. of Rights required to buy a Right share=No of share Outstanding/(amount to be raised/Subscription price(SP))
	n=(30 million/($50 million/SP) = 30 million x SP /$50 million = 0.60 x SP
	ROP = Right on price or Cum-Right price = $106
	Stock ex-rights =$98
	SP = Subscription price = ??
	Stock ex-rights = [n x ROP + SP] /(n+1)
	$98 =[ (0.60 x SP) x $106 + SP ] /((0.60 x SP)+1)
	$98 x (0.60 x SP+1) =[ (0.60 x SP x $106 + SP ]
	58.8 x SP + 98 = 63.6 x SP + SP
	98 = 64.6 SP - 58.8 SP
	SP = 98/5.8
	SP=$16.89655
	SP=$16.90
	SP = Subscription price = $16.90
Please feel free to ask if anything about above solution in comment section of the question.