Question

Prahm Corp. wants to raise $5.6 million via a rights offering. The company currently has 550,000 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 7 percent spread. If you currently own 8,000 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?

Multiple Choice

• $20,533.78

• $20,271.49

• $21,389.35

• $22,458.82

• $22,244.93

Answer 1

Answer :Correct option is Proceed from sale of right : $21,389.35

Calculation :

First calculate Net Proceeds per share

= Subscription price per share * (1 – Spread)

= 30 * ( 1 - 0.07 )

= 27.9 per share

New shares offered = 200,716.845878 Shares ($5,600,000 / $27.9 per share )

Number of rights needed = 2.74017857143 ( 550,000 Shares / 200717 Shares )

Ex-right stock price will be :

Ex-rights stock price = [ ( Number of rights needed x selling price per share) + Subscription price ] + [ Number of rights needed + 1]

= [ ( 2.74017857143 x $40 per share) + $30 per share] / [ 2.74017857143 + 1]

= [$109.607142857+ $40] /3.74017857143

= $37.3263308665 per share

the value of a right = Selling price per share - Ex-rights stock price

= $40 per share - $ 37.3263308665per share

= $2.6736691335per share

So proceeds from selling right will be

Number of shares x value of a right

= 8000 Shares x $2.6736691335 per share

= $21389.35