Question

Wuttke Corp. wants to raise $4.7 million via a rights offering. The company currently has 570,000 shares of common stock outstanding that sell for $90 per share. Its underwriter has set a subscription price of $40 per share and will charge the company a spread of 5 percent. If you currently own 2,500 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? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

PROCEEDS FROM THE SALE OF RIGHTS :

Net proceeds per share = Subscription price per share * (1 - spread)

Net proceeds per share= $40 per share * (1- 0.05)

= $40per share * 0.95

= $38 per share

New share offered= {$4,700,000 /$38per share}

New share offered= 123,684 Share

Number of rights needed= {570,000 share /123,684 share}

Number of rights needed= 4.608

THE EX-RIGHTS STOCK PRICE WILL BE:

Ex-rights stock price= {(number of rights needed * selling price per share) + Subscription price} / {Number of rights needed + 1}

Ex-rights stock price= {(4.608 * $90 per share) +$40per share} / {4.608 + 1}

Ex-rights stock price= {$414.72 + $40 per share} / 5.608

Ex-rights stock price= $81.08 per share

SO THE VALUE OF A RIGHT = SELLING PRICE PER SHARE - EX-RIGHTS STOCK PRICE

= $90 per share - $81.08 per share

= $8.92 per share

PROCEEDS FROM SELLING THE RIGHTS WILL BE

=Number of share * value of a right

= 2,500 share * $8.92 per share

= 22,300 share

The proceeds from sale of rights will be $22,300.